How Much Money Will I Need in Retirement? (2024)

Summary:

Financial experts generally use one of several shorthand rules to estimate how much money you’ll need in retirement.

Most Americans will need around 10 times their pre-retirement salary or roughly $1 million to retire comfortably, whichever is higher.

However, it’s typically not recommended to start your retirement plans with a specific number in mind.

Instead, you may gain more traction by calculating your expected expenses in retirement and working backward from that amount, or by using a shorthand rule that accounts for the cash flow you’ll need to pay for retirement expenses.

In this article, we’ll outline the basics of how you can calculate the amount of money you’ll need to retire comfortably.

Note, however, that no shorthand rule or calculator can accurately predict how much money you’ll need in retirement. You should always consult with a financial professional who has reviewed both your current situation and goals for the future before choosing any specific investing and saving strategies.

Start with some retirement basics

When calculating how much money you’ll need in retirement, it can be helpful to think of retirement as a cash flowchallengeinstead of a savings challenge.

Specifically, the amount of money you have saved is generally less important than ensuring you have sufficient income to cover your retirement expenses.

While the topic may seem daunting at first, saving for retirement comes down to answering one core question: how do I ensure my income in retirement is enough to cover my expenses?

There are several ways to solve this problem, which we’ll outline below.

However, it’s important to keep this central question in mind as you start out on your retirement planning journey.

Calculate how much money you’ll need using different frameworks

If you want to figure out how much money you’ll need in retirement, start by making two essential assessments about your future financial situation:

What will your income be at different ages close to retirement?

How much money do you plan to spend in retirement?

Financial experts have created several rules of thumb and calculators for calculating ideal retirement savings amounts.

Most of these estimates rely on one or both of these numbers to make accurate forecasts for your future financial needs.

Understanding the 4% withdrawal rule

In 1994, Financial Advisor William Bengen published a paper titled “Determining Withdrawal Rates Using Historical Data” that analyzes several different methods of withdrawing money in retirement.

In this paper, Bengen proposes a strategy now commonly referred to as the “4% rule.”

Under this rule, retirees can safely withdraw around 4% of their retirement savings in the first year of retirement and then make withdrawals in subsequent years that track the pace of inflation.

By following this strategy, Bengen’s research predicts that almost all retirement accounts will last at least 30 years, with some accounts lasting 50 years or longer.

In contrast, a withdrawal rate starting at 5% would result in more than half of portfolios running out of money in less than 50 years, with a chance for the worst-performing portfolios to run out after 20 years.

For example, imagine that you just entered your first year of retirement and have $1 million saved in an investment account.

In your first year of retirement, you withdraw 4% of your account, or $40,000, and at the time inflation is averaging 3%.

In your second year of retirement, you take your withdrawal amount from the prior year ($40,000) and adjust it based on the prior year’s inflation rate (3%). So, in your second year, you withdraw $41,200.

You would then need to adjust your withdrawals to keep up with inflation for the remainder of your retirement.

Applying the 4% rule to your savings goals

Now that you better understand the 4% rule and how it works, you can apply this rule to your savings goals to estimate how much money you’ll need to retire.

Returning to the discussion from earlier, you should remember that retirement is a cash flow challenge, not a savings challenge. You should start by looking at how much money you’ll spend in retirement, then use that number to calculate how much to save.

As a rule of thumb, you can estimate that you’ll spend roughly 80% of your pre-retirement income on expenses every year during retirement.

Or, put another way, in your first year of retirement, you’ll need to create a source of income to match around 80% of your pre-retirement earnings.

For example, if you make $100,000 in the year before you retire, you’ll need an income of $80,000 to pay for your expenses during your first year of retirement.

So, how do you reach this income number?

To begin, calculate how much money you (and your spouse) will receive from Social Security and other guaranteed payments (such as pensions and annuities) annually.

Subtract this number from your required retirement income to arrive at the amount of money you’ll need to withdraw from your retirement accounts each year.

Using our example from above, let’s assume that you and your spouse each receive around $20,000 annually from Social Security now that you’re retired.

Subtracting these amounts from the $80,000 estimate from earlier gives us a new income requirement of $40,000. Applying the 4% rule to this amount, we could divide $40,000 by 4%, resulting in a final savings number of $1 million.

Put another way, to have an income of $40,000 in retirement under the 4% rule (after factoring in Social Security), you’d need to save roughly $1 million in a retirement account.

You can then adjust this math up or down to look at how much money you’ll need in different scenarios.

Use these high and low estimates to build out a general range of how much you should save in your account. Then, use this range to inform your saving and investing goals.

Alternative ways to estimate how much money you’ll need to retire

The 4% rule requires a bit of math, and some financial experts believe that the rule is too conservative and rigid for some situations since it assumes a minimum 30-year retirement and a 50/50 split between stocks and bonds.

For this reason, it can be helpful to check your math using a few other frameworks so you can build out a broad range of estimates for how much you’ll need to save for retirement.

Option 1: Save around $1 million in an investment account

Historically, when asked how much money Americans should save for retirement, financial experts would throw out broad numbers such as $1 million or $2 million as a quick, general goal.

These amounts allow for a healthy withdrawal rate of 4–5% per year (accounting for appreciation and inflation) while still giving you enough income to live comfortably in most areas across the United States.

As outlined above, if you save $1 million in an account with a 50/50 split between stocks and bonds, you could withdraw $40,000 each year to fund retirement without worrying too much about running out of money.

Accordingly, saving $2 million would result in a withdrawal income of $80,000 in your first year of retirement.

Combined with Social Security, these numbers mean that the average American could comfortably retire with around $1–2 million in a retirement account.

Option 2: Save a multiple of your pre-retirement salary

Another common shorthand rule is to take your pre-retirement salary and multiply this number by eight, 10 or 12 to arrive at a final range for how much money you should save.

For example, let’s say you expect to make $100,000 in the year before you retire.

Using the multiples from above, and assuming a 4% withdrawal in your first year of retirement, we would arrive at the following numbers:

As you can see, these numbers closely match the estimates from the 4% rule above and the general “around $1 million” approximations in the previous section.

Option 3: Factor in other sources of income

Finally, remember that retirement is solely a question of cash flow—where your income must always remain higher than your expenses.

Any additional sources of income in retirement (or any drastic reductions in your expenses) will change the estimates for how much you’ll need to save.

Many retirees choose to take on a part-time job or find another source of income to pad their retirement budgets, such as purchasing and renting real estate.

Others choose to live with their younger family members to cut housing costs out of the equation, either entirely or in part.

Still others choose to put their money into an annuity, which will pay out a consistent amount of money for either a set period or the rest of their life.

The key thing to remember is that—no matter your strategy—your goal should be to ensure you have enough money to cover your expenses throughout your retirement years.

Running out of money too early can lead to financial insecurity, especially for individuals with high health costs in their old age.

On the other hand, saving too much money for retirement can also be unwise, as it may limit opportunities to enjoy life in your income-earning years.

Finding the right balance between saving money and living in the moment can be difficult, which is why it’s important to find a retirement savings number that works for you.

After you factor in other sources of income such as real estate or an annuity, your final savings number should reflect the amount of money you’ll need to meet your financial obligations in retirement.

Retirement savings age benchmarks to consider

Fidelity Investments—an asset management firm with close to $4.3 trillion in assets under management—recommends saving 15% of your income beginning at age 25.

By following this recommendation, you naturally hit several saving benchmarks before reaching a final goal of saving 10 times your pre-retirement income by age 67.

Fidelity notes the following benchmarks for how much you should have saved for retirement for different age brackets:

For example, if you have an income of $100,000, Fidelity suggests that you should have $100,000 in your retirement account at age 30, $300,000 by age 40, $600,000 by age 50, $800,000 by age 60, and $1 million when you retire at age 67.

If you’re below these income-driven multiples, it may be wise to consider increasing how much you save to get back on track for your retirement goals.

Comprehensive retirement planning solutions built for you

Answering the question of how much money you’ll need to retire with any certainty can be difficult. Financial professionals use several shorthand formulas to estimate a general target for how much money you’ll need to retire.

One of the most common of these formulas is the 4% rule, which states that you’ll need enough money that a 4% withdrawal (combined with other income sources such as Social Security) will pay for all your expenses in your first year of retirement.

Other strategies, such as saving a multiple of your pre-retirement gross income, can also help estimate how much money you’ll need to retire.

If you want a more specific number, however, you’ll need to discuss your unique situation with an experienced financial professional who can help you understand the nuances of different financial projection models.

Our financial experts are available to help you understand the basics of planning for retirement.

If you’d like to speak with a financial professional about your retirement saving goals, give us a call at 800-236-8866, schedule an appointment online or stop in at any of our Associated Bank locations.

We’d be happy to help you build a retirement plan or investment strategy that can help you reach your financial goals now and into the future.

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