The amount of money you need to retire depends on several factors, including when you plan to retire, your desired retirement lifestyle, and where you live. Generally, experts recommend saving enough to replace 60-80% of your pre-retirement income in retirement. With life expectancies rising, you may need enough savings to last 20-30 years or more in retirement.
How much income will I need in retirement?
As a general guideline, plan on needing around 70-80% of your pre-retirement income to maintain a similar standard of living in retirement. However, your specific needs may be higher or lower depending on these factors:
- When you retire – If you retire early, you’ll need your retirement savings to last longer.
- Debt – Being debt-free in retirement will reduce your income needs.
- Housing – If you’ve paid off your mortgage, you may need significantly less income.
- Healthcare costs – Out-of-pocket medical expenses tend to rise later in retirement.
- Lifestyle – Maintaining an active, travel-focused lifestyle will require more income.
- Inflation – Inflation erodes purchasing power over time, so factor in 3% annual increases.
Use your current monthly spending as a starting point. Identify needs vs. wants and adjust for the factors above to project a retirement income target.
How much should I have saved?
A common guideline is to have around 10-12 times your ending salary saved by retirement age. However, the amount you need specifically depends on:
- Your planned retirement age and life expectancy
- Income replacement ratio you’re targeting
- Rate of return you can expect on investments
- Retirement account balances and other assets/savings
- Social Security benefits you or your spouse will receive
- Pension income you will receive, if any
- How much you have already saved so far
Online retirement calculators can help determine savings targets based on integrating all of these factors. Or you can consult with a financial planner.
Rules of Thumb
While your specific needs vary, here are some benchmarks to gauge if you may be behind, on track, or ahead:
- By age 30: Have 1x your salary saved
- By age 40: Have 3x your salary saved
- By age 50: Have 6x your salary saved
- By age 60: Have 8x your salary saved
- By age 67: Have 10-12x your salary saved
How should I invest my retirement savings?
Your retirement portfolio should be invested more aggressively when you’re younger and become progressively more conservative as you approach retirement age. Here are some guidelines:
- Early career (20s-30s) – 80-90% stocks/10-20% bonds
- Mid-career (40s-50s) – 60-70% stocks/30-40% bonds
- Approaching retirement (60s) – 40-50% stocks/50-60% bonds
- Early retirement – 30-40% stocks/60-70% bonds
- Later retirement – 20-30% stocks/70-80% bonds
Diversify your investments across stocks, bonds, mutual funds, and other alternative asset classes. Rebalance your portfolio at least once a year to maintain your target asset allocation.
How can I catch up if I’m behind on retirement savings?
If you find you haven’t saved enough for retirement, take these actions to close the gap:
- Increase your retirement account contributions and save at least 15% of income or max out contributions.
- Reduce discretionary spending and funnel savings into retirement accounts.
- Consider retiring later to allow more time to save and shorten your retirement timeframe.
- Invest more aggressively using stocks to pursue higher returns.
- Look for ways to increase your income through a side business, freelancing, or promotions at work.
Waiting longer to collect Social Security can also boost your monthly benefit. If you’re still significantly behind on savings, consult a financial advisor for guidance on closing the gap.
How much can I withdraw each year from my retirement savings?
Experts recommend limiting annual retirement withdrawals to 4-5% of your portfolio value in the first year, then increasing for inflation each subsequent year. This “4% rule” historically allowed 30 years of income for a retirement portfolio with 50-75% stocks. However, today’s low bond yields may require reducing the initial withdrawal rate to 3-4%.
You can also consider a variable withdrawal strategy, where you take less income in down markets and more as markets recover. Work with a financial planner to develop an appropriate, optimized withdrawal strategy for your situation.
How will taxes affect my retirement income?
Taxes can significantly impact your net income in retirement. Be sure to factor them into your income and withdrawal strategies:
- Social Security may be taxed up to 85% if your income exceeds certain thresholds.
- You may owe ordinary income taxes on traditional 401(k)/IRA withdrawals.
- Capital gains and dividends will be taxed if not held in a tax-advantaged account.
- Required minimum distributions (RMDs) from retirement accounts are taxed as ordinary income.
- Wages from part-time work are taxed as ordinary income and may impact your Social Security taxes.
Consider opening a Roth IRA or Roth 401(k) to shelter investment earnings from taxes. Develop a retirement income stream that helps optimize taxes.
What retirement savings vehicles should I be using?
Leverage tax-advantaged retirement accounts as the foundation for your savings. Contribute enough to maximize employer matches in 401(k)s and IRAs. These accounts typically provide the best incentives:
- 401(k)s and 403(b)s – Pre-tax contributions lower your taxable income. Many employers match contributions.
- IRAs – Anyone can contribute up to annual limits. Choose Roth or traditional based on your tax rate outlook.
- Roth 401(k)/403(b) – After-tax contributions but tax-free growth and withdrawals in retirement.
- 457(b) – Tax-deferred savings plan for government employees.
- Health Savings Account (HSA) – Triple tax benefit for certain medical expenses.
Maximize your workplace plans first before contributing to an IRA. Open an IRA if you don’t have access to a 401(k) through your employer.
What options do I have if I can’t afford to retire?
If your savings look to be inadequate for retirement, consider these options:
- Delay retirement a few additional years to increase savings and shorten your retirement timeline.
- Reduce your retirement lifestyle expectations and projected spending.
- Relocate to a lower cost-of-living area.
- Consider reentering the workforce part-time during early retirement for extra income.
- Consult with a financial planner to improve your retirement outlook.
With sufficient adjustments to your plan, you may still be able to achieve an enjoyable retirement. Be proactive about facing savings shortfalls and don’t delay making changes.
What steps can I take to retire early?
Retiring early requires diligent planning and sufficient savings. Here are some tips:
- Increase savings rate substantially to max out retirement accounts.
- Reduce expenses and optimize budget to maximize savings.
- Be willing to relocate to a lower cost area.
- Invest portfolio aggressively using stocks to drive growth.
- Consider taking on side income through freelance work or a small business.
- Hold off claiming Social Security until age 70 to maximize benefits.
Test different retirement ages with your savings plan to target the earliest realistic age possible. Early retirement may require some lifestyle adjustments.
How can I protect my retirement savings and income?
Consider these tactics to help fortify your retirement finances against market downturns and risks:
- Maintain an emergency cash fund of 6-12 months of living expenses.
- Invest in low-volatility assets like bonds and dividend stocks near/during retirement.
- Purchase an immediate annuity to cover fixed essential expenses.
- Consider a reverse mortgage to access home equity without selling.
- Maintain adequate health insurance, life insurance and long-term care insurance.
- Update estate plan documents and powers of attorney for medical and finances.
Work with financial and legal professionals to implement appropriate protection strategies and safeguards. Don’t let unexpected catastrophes derail your retirement.
Conclusion
Determining how much you need to retire depends on closely assessing your expected retirement lifestyle, income needs, and savings time horizon. Target saving 10-12 times your ending salary by retirement age as a general goal. Use retirement calculators and financial planning to develop a more precise savings and income plan tailored to your situation. Retiring early or on limited savings will require adjustments to spending and lifestyle. Be proactive in your planning, maximize savings, and protect your finances to help ensure a comfortable retirement.