Retirement planning can seem daunting, especially when trying to determine how much money you’ll need to retire comfortably. Many factors impact how much a couple needs to retire, including desired retirement lifestyle, healthcare costs, inflation, Social Security benefits, and more. While the specific amount needed varies for each person, examining average retirement costs and recommendations can provide a helpful benchmark.
What is considered a comfortable retirement lifestyle?
Comfort in retirement means different things to different people. A comfortable retirement lifestyle may include:
- Maintaining a similar standard of living as during working years
- Having the ability to travel and pursue hobbies
- Financial security without needing to stress about money
- Access to high-quality healthcare
- Option to help support children/grandchildren financially
The level of comfort also depends on factors like:
- If the home mortgage will be paid off
- Whether retirees will continue working part-time
- If retirees will move to a lower cost-of-living area
Knowing your retirement goals and priorities can help determine your target saving amount.
Average retirement costs
While costs are different for each person, here are some averages for a comfortable retirement:
Housing – For retirees who still have a mortgage, housing costs may be 15-35% of total expenses. For renters or those with a paid off home, 10-20% may be needed for taxes, insurance and maintenance.
Healthcare – Healthcare is a significant cost for retirees, with average costs being 5-15% of total expenses. Out-of-pocket costs vary greatly depending on Medicare and supplement plans selected.
Food – Groceries, dining out and other food costs may range from 10-20% of spending.
Transportation – For retirees still driving their own cars, 5-15% may be needed for fuel, maintenance, insurance and public transportation.
Discretionary spending – Travel, gifts, entertainment and other discretionary purchases may account for 15-30% of expenses.
As a general benchmark, retirees may need around 80% of their final pre-retirement income to maintain their standard of living (excluding discretionary purchases). However, this varies significantly based on individual circumstances.
How inflation impacts retirement costs
Inflation can have a major impact on retirement spending over time. Even at a modest 3% annual inflation rate, costs will nearly double every 25 years:
| Year | Annual Cost |
|---|---|
| 1 | $50,000 |
| 10 | $67,556 |
| 20 | $91,392 |
| 25 | $98,337 |
This demonstrates why retirement savings must factor in inflation to help maintain purchasing power over decades of retirement. Targeting just $50,000 annually may prove inadequate in the future.
How Social Security factors in
Social Security provides an inflation-adjusted source of income that can cover a portion of expenses in retirement. The average 2023 monthly benefit for retired workers is $1,827. When added to a spouse’s benefit, the monthly household Social Security income may reach $3,000 or more.
This replaces about 30-50% of pre-retirement income on average. Of course, higher earning households may see Social Security replace a lower percentage of their prior wages. Even so, it remains a foundational piece of retirement income for most.
Recommended retirement savings guidelines
Financial advisors typically recommend saving at least 10-15% of income throughout one’s working years for retirement. This includes any employer contributions.
General savings benchmarks for retirement readiness include:
- 1x final salary by 30 years old
- 3x final salary by 40 years old
- 6x final salary by 50 years old
- 8x final salary by retirement age
So for example, if your final salary prior to retirement is $100,000, you would target $800,000 or more in retirement savings by that point.
These benchmarks help guide adequate savings based on expected costs and life expectancy in retirement.
How much will healthcare cost in retirement?
Healthcare is one of the most significant expenses in retirement that can vary substantially based on a couple’s health.
According to Fidelity Investments, the average retired couple age 65 in 2022 needs about $315,000 saved just for healthcare costs in retirement. This covers items like:
- Medicare Part B and Part D premiums
- Medigap or Medicare Advantage policy premiums
- Out-of-pocket costs for copays, deductibles, prescriptions
It projects a 65-year-old couple in 2022 would need $9,000 on average that year for medical expenses. By age 85, the projected cost grows to $19,000. Over a 20-year retirement, the total average healthcare cost per couple is estimated at $315,000.
These costs can vary significantly, however, based on overall health and selection of Medicare plans. Poor health, chronic conditions, and gaps in supplemental coverage can push healthcare costs much higher.
Case study 1: Average retirement costs for a couple
Let’s look at an example of average estimated retirement costs for a relatively comfortable lifestyle:
- Housing: $1,500/month (18% of total)
- Food: $700/month (8%)
- Transportation: $300/month (4%)
- Healthcare: $500/month (6%)
- Discretionary: $1,000/month (12%)
- Miscellaneous: $1,000/month (12%)
Total monthly expenses: $5,000
Annual expenses: $60,000
This demonstrates an average comfortable, but not lavish, retirement lifestyle for a couple with no mortgage. Factoring 3% annual inflation, expenses would reach close to $98,000 by year 25 of retirement.
Using the retirement income benchmark of needing about 80% of pre-retirement income, this couple would need retirement savings of about 15 times their desired annual income, or $900,000 saved.
This allows for $60,000 initial annual withdrawals, plus $24,000 from Social Security for total annual income of $84,000. This matches the 80% target based on their $100,000 final working income.
Case study 2: Lower cost retirement
If retirees are willing to downsize and live more modestly, retirement costs can be significantly lower. Here is one example:
- Housing: $800/month (13%)
- Food: $600/month (10%)
- Transportation: $200/month (3%)
- Healthcare: $400/month (7%)
- Discretionary: $700/month (12%)
- Miscellaneous $500/month (8%)
Total monthly expenses: $3,200
Annual expenses: $38,400
In this scenario with more modest housing, transportation, dining and discretionary costs, the couple needs about $600,000 saved to generate $38,400 annual income.
This allows withdrawing $14,400 from savings annually, plus the $24,000 Social Security income. Their total $52,400 retirement income is about 80% of their $65,000 final pre-retirement income.
Case study 3: More lavish retirement
On the higher end, some retirees envision a more luxurious lifestyle with extensive travel and leisure activities. Here is one example:
- Housing: $3,000/month (18%)
- Food: $1,000/month (6%)
- Transportation: $1,000/month (includes travel) (6%)
- Healthcare: $500/month (3%)
- Discretionary: $3,000/month (18%)
- Miscellaneous: $2,000/month (12%)
Total monthly expenses: $10,500
Annual expenses: $126,000
To generate this level of income and have $126,000 to withdraw each year, this couple would likely need about $3 million in retirement savings.
This allows withdrawing $102,000 from savings, plus their $24,000 Social Security income. Their total retirement income is about 80% of their $150,000 pre-retirement income.
As you can see, the ideal retirement target can vary significantly based on desired lifestyle and expenses.
How to calculate specific retirement needs
The best way to estimate your specific retirement saving needs is to:
- Document your expected recurring retirement costs based on your desired lifestyle
- Factor in likely healthcare expenses based on your health and insurance selections
- Identify any large one-time expenses, like travel, vehicles or home renovations
- Calculate your estimated Social Security income in retirement
- Aim for total income of about 80% of your final pre-retirement income
- Use online calculators to determine the lump sum savings needed to generate your required annual income
This level of planning can help couples target the appropriate savings to afford their envisioned retirement and adapt as needed over the years.
How couples can boost retirement savings
Here are some tips for couples to maximize retirement savings:
- Start saving early and consistently
- Take full advantage of employer retirement plans and health savings accounts
- Automate transfers from your paycheck to retirement accounts
- Aim to increase savings rate annually as income rises
- Delay Social Security until age 70 if possible
- Consider downsizing home to reduce expenses
- Invest savings wisely for growth over time
Meeting regularly with a financial advisor can also help couples develop and stick to a customized retirement saving strategy.
Key factors that impact retirement target needs
While target savings amounts differ for each person, key factors that influence retirement needs include:
- Age when retiring: Retiring earlier requires more savings to cover additional years outside the workforce.
- Debt entering retirement: Paying off mortgage and other debts substantially reduces required retirement income needs.
- Life expectancy: Longer life expectancies mean retirement savings must last longer.
- Income stability: Steady lifetime income from pensions or annuities can lower savings needed from other sources.
- Health outlook: Excellent health likely means lower healthcare costs in retirement.
- Inflation: Higher inflation erodes purchasing power of retirement savings over time.
Carefully considering these elements can help refine retirement savings goals.
The impact of withdrawing savings too quickly
One risk for retirees is withdrawing retirement savings too aggressively in the early years, jeopardizing the sustainability of the portfolio over the long-term.
It’s important to follow the 4% rule for retirement withdrawals. This means limiting annual withdrawals to about 4% of total savings in the first year of retirement, then adjusting this dollar amount annually for inflation.
For example, a retiree with $1 million in retirement savings would withdraw only $40,000 in the first year. Even if planned expenses were higher, remaining disciplined with withdrawals helps ensure savings last throughout retirement.
Taking out 8-10% of savings annually is often unsustainable over decades of retirement. The money can run out too quickly later in retirement due to ongoing portfolio withdrawals and eroded principal from market downturns.
Consider delaying retirement if savings fall short
For those who calculate their retirement savings needs and find they are behind, working a few extra years can make a significant impact. Just a couple extra years to allow for additional saving and compound growth allows retirees to withdraw less annually from existing savings.
Delaying Social Security until age 70 also substantially increases monthly income. For couples with a projected shortfall, a customized plan from a financial advisor can help analyze options to boost income or reduce planned expenses.
Accounting for market volatility
Even a well-funded retirement portfolio can sustain losses during periods of market volatility. To help manage this risk, retirees should hold a few years of safe assets, like cash and bonds, outside volatile investments. This allows withdrawing safe asset income and avoiding selling equities at a loss during down markets.
Periodic rebalancing of the portfolio back to target allocations also helps lock in gains from appreciated assets. Remaining invested in equities during retirement provides growth potential to combat inflation.
Tax planning opportunities
Taxes can take a significant bite out of retirement income. Some strategies to help retirees minimize taxes include:
- Withdrawing from tax-deferred accounts first to allow tax-free Roth balances to keep growing
- Withdrawing just enough annually to stay within each tax bracket threshold
- Holding tax-exempt municipal bonds in taxable accounts
- Waiting until age 72 to take Required Minimum Distributions from accounts
- Converting portions of traditional IRAs to Roth IRAs each year to spread out the tax impact
Coordination of withdrawals across various accounts can help reduce the overall effective tax rate each year.
Managing rising healthcare costs
As healthcare costs rise consistently faster than general inflation, this can become a major expense for retirees. Strategies to control costs include:
- Choosing Medicare Advantage over Medigap if in good health
- Selecting the most affordable Medicare Part D prescription plan
- Using tax-free HSAs to pay healthcare expenses
- Getting preventative care to stay healthy
- Seeking second opinions and shopping around for procedures
Maintaining health and using the most cost-efficient coverage options makes healthcare spending more manageable in retirement.
Have a retirement spending budget
A detailed budget tailored to retirement expenses helps couples track where their money is going. This allows identifying any areas of overspending to adjust. Sticking to a spending plan each month and year helps retirees live within their means.
Planning discretionary expenditures in advance rather than spending impulsively helps ensure retirement savings last. Budgeting with realistic healthcare estimates, inflation-adjusted figures and sustainable withdrawal rates gives couples more financial control in retirement.
Be ready to adjust along the way
Despite the most meticulous retirement planning, unexpected events can still arise. Retirees may need to adjust their plan along the way for items like:
- Surging inflation that dramatically impacts expenses
- Major new healthcare costs if long-term care is needed
- Supporting aging parents or adult children financially
- Costly home or auto repairs
Having some built-in flexibility within retirement spending and assets helps couples adapt to changing circumstances over decades of retirement.
Conclusion
Determining retirement savings needs among so many variables can seem challenging. But following general guidelines around replacing 80% of pre-retirement income, factoring inflation, and maintaining reasonable withdrawal rates allows couples to target ballpark figures. Adjusting periodically for new expenses or market conditions helps ensure savings stay on track.
While preparing for a comfortable retirement takes diligent planning and saving, couples that make retirement readiness a priority throughout their careers can help make their next chapter a financially secure one. Discussing needs, running calculations together, and meeting with an advisor to create a roadmap can get couples aligned on their vision. With shared goals, teamwork, and thoughtful preparation, couples can aim to enjoy their desired retirement lifestyle while prudently managing their hard-earned savings.