Deciding on the right time to retire is a very personal decision that depends on many factors like your age, marital status, health, life expectancy, career satisfaction, retirement dreams and current net worth. While there is no one-size-fits-all answer, most financial experts recommend having a net worth of at least $1 million to retire comfortably. However, the amount you need can vary significantly based on your unique situation.
In this article, we will discuss what is considered a good net worth to retire at different ages and scenarios. We will also provide tips on how to calculate your target retirement net worth. Read on to learn how to assess if you are financially ready to retire.
What is Net Worth?
Before we dive into retirement net worth targets, let’s quickly go over what net worth means. Your net worth is calculated by subtracting your total liabilities or debts from your total assets. Here is the formula:
Net Worth = Total Assets – Total Liabilities
Assets include things you own that have monetary value like your house, vehicles, investment accounts, retirement accounts, cash savings and valuables. Liabilities are debts you owe like mortgages, car loans, student loans and credit card balances.
To calculate your net worth, make a list of all your assets and their current values. Then make a list of your liabilities and their balances. Subtract your total liabilities from total assets to get your net worth.
Knowing your net worth is important for retirement planning because it represents your complete financial picture. A higher net worth means you have more assets to generate retirement income from.
Target Net Worth to Retire at 65
Age 65 is considered the full retirement age by Social Security. Most Americans aim to retire around this age once they become eligible for Medicare and full Social Security benefits.
According to Fidelity Investments, you should aim to retire at 65 with a net worth equal to 10 times your ending salary. So if you earn $100,000 in your last year of work, you should target a net worth of $1 million.
This is a good baseline target but you may need more or less depending on your lifestyle and Sources of retirement income.
Here are some guidelines based on your pre-retirement income:
| Annual Pre-Retirement Income | Target Net Worth to Retire at 65 |
|---|---|
| $30,000 | $300,000 |
| $50,000 | $500,000 |
| $75,000 | $750,000 |
| $100,000 | $1 million |
| $150,000 | $1.5 million |
As a general rule, the more you earn and spend before retirement, the higher your net worth needs to be to maintain your lifestyle. A $1 million target may cover basic needs for a moderate income earner but it will fall short for someone used to spending $150,000+ per year.
Factors that Increase Your Target
You may need a higher net worth if:
- You live in a high cost area like New York or San Francisco
- You have high health care costs due to chronic illness
- You want to travel extensively or engage in expensive hobbies
- You need to support other family members
- You have a mortgage, debts or student loans
- You want to leave a legacy for heirs
Some experts recommend having a net worth of $1.7 million or more if you plan to retire at 65 in a high cost city like New York.
Targeting at least $1.5 million gives you a larger cushion for unexpected costs. Having over $2 million allows for greater peace of mind and more retirement options.
Factors that Decrease Your Target
You may need a lower net worth if:
- You plan to relocate to a lower cost region
- You have minimal debt obligations
- You have income from rental properties or side businesses
- You expect to downsize your home
- You have generous pension or annuity income
- You are in good health with lower healthcare costs
- You are eligible for subsidized Senior Housing
If you live frugally, have fixed income streams or aim to move to a LCOL area, you may be comfortable retiring at 65 with a net worth as low as $750,000.
Having $500,000 can work if you own your home outright and qualify for Social Security, Medicare and other senior benefits. But you will need to budget carefully.
Target Net Worth to Retire at 60
Many individuals choose to retire early in their 60s once their children are grown and their biggest expenses are behind them. Retiring at 60 comes with both advantages and challenges.
On the plus side, you get more years to pursue hobbies, travel the world, spend time with family or relax. You also minimize late career burnout.
The tradeoffs are you have fewer earnings years left to build your net worth. You need your retirement savings to last longer since you may live 25+ more years. Early Social Security benefits are reduced if claimed before age 65.
Here are general net worth targets if you want to retire at 60:
| Annual Pre-Retirement Income | Target Net Worth to Retire at 60 |
|---|---|
| $30,000 | $350,000 |
| $50,000 | $600,000 |
| $75,000 | $900,000 |
| $100,000 | $1.25 million |
| $150,000 | $1.75 million |
Aim for the higher end of the target ranges if you want to retire at 60 comfortably. Having $2 million or more provides greater security and flexibility. Consider delaying retirement a few years if you are below the minimum thresholds.
Target Net Worth to Retire at 55
Retiring at 55 is considered very early retirement. It allows for retirement dreams like traveling full-time or pursuing ventures like opening a small business. But retiring at 55 requires diligent financial planning so you don’t run out of money.
Very few households have the net worth to retire this early unless they have semi-retired with rental or business income. Here are the minimum net worth amounts most experts recommend to retire comfortably at 55:
| Annual Pre-Retirement Income | Target Net Worth to Retire at 55 |
|---|---|
| $30,000 | $400,000 |
| $50,000 | $700,000 |
| $75,000 | $1 million |
| $100,000 | $1.5 million |
| $150,000 | $2.25 million |
Retiring at 55 typically requires having at least $1 million in net worth as a baseline. To maintain a high-spending lifestyle you will likely need $2 million or more.
Run the numbers carefully and have a plan before leaving the workforce this early. Consider delaying retirement a few more years to give your savings more time to grow if your current net worth is below $1 million.
How to Calculate Your Retirement Number
Determining how much net worth you need to retire goes beyond basic rules of thumb. You need to calculate your full retirement picture including expected costs, incomes, taxes, inflation and a safe withdrawal rate from savings.
Here are the steps to calculate your target retirement net worth number:
1. Estimate Your Annual Retirement Expenses
Add up an estimate of what you expect to spend annually in retirement. Be detailed and break it down by category:
- Housing – rent/mortgage, property taxes, utilities, maintenance
- Food
- Transportation – vehicle payments, insurance, gas
- Travel, entertainment, dining out
- Healthcare – insurance, medications, out of pocket costs
- Insurance – life, disability
- Taxes
- Gifts, donations, loans to family
- Personal spending – clothing, hobbies, subscriptions
- Miscellaneous
If you spend $50,000 per year before retirement, assuming a similar lifestyle your annual expenses may be around $40,000 in retirement since you won’t have work-related costs.
But add 10-20% for higher healthcare costs as you age. Also factor in inflation which will make costs higher year after year.
2. Estimate Your Annual Retirement Income
Next, estimate any guaranteed income you can count on annually in retirement:
- Social Security payments for you and your spouse
- Defined benefit pensions or annuities
- Rental income from properties
- Business income if semi-retired
- Inheritance you expect to receive
- Income from part-time work
For example, if you expect $25,000 per year from Social Security and $10,000 from a pension, you have secured $35,000 in annual retirement income you won’t need to tap savings for.
3. Calculate Your Annual Retirement Gap
To get your shortfall amount that needs to come from savings, subtract your guaranteed annual incomes from your expected annual spending.
For instance:
Annual retirement expenses: $50,000
Guaranteed annual incomes: $35,000
Annual gap: $15,000
This gap is the annual amount you need to withdraw from your retirement savings.
4. Estimate the Number of Years in Retirement
To determine how long your savings need to last, estimate your life expectancy. Use your current age and demographic life expectancy tables.
But it’s best to plan for at least 30 years in retirement to be very conservative. If retiring at 65, plan for your savings to last until age 95.
5. Choose a Safe Withdrawal Rate
Most experts recommend using an initial safe withdrawal rate of 3-4% from your retirement savings. This allows your principal to continue growing while covering living expenses.
A 4% rate is commonly used but is a bit aggressive. Using 3-3.5% offers more protection against market declines.
6. Calculate Your Retirement Number
With the above inputs, you can now calculate your target net worth at retirement.
Use this formula:
(Annual retirement expenses – Guaranteed annual income) x 25
This multiplies your annual gap amount by 25 to generate the savings needed to withdraw that amount for 25 years with a 4% withdrawal rate.
For example, if your annual gap is $15,000, multiply this by 25 = $375,000.
This gives you your net worth goal. Having $375,000 saved will allow withdrawing $15,000 per year for 25 years at a 4% rate.
Of course, the more years in retirement you need to plan for, the higher your net worth needs to be.
How to Grow Your Net Worth Faster
Once you know your target retirement net worth amount, here are 5 strategies to ramp up growth:
1. Increase Your Income
Look for ways to increase your income like asking for a raise, finding a higher paying job, monetizing a hobby or starting a side business. The more you earn, the faster you can grow net worth.
2. Decrease Your Spending
Cut back discretionary spending on eating out, entertainment, travel and shopping. Downsize your home if it’s too expensive. Drive your vehicles longer without upgrading. Look for ways to lower your fixed costs.
3. Pay Down Debts
Pay more than the minimums on credit cards, car loans and student loans. Having less debt obligations in retirement minimizes expenses. Consider debt consolidation.
4. Max Out Tax-Advantaged Savings
Contribute up to the IRS annual limits on 401ks, IRAs and HSAs to benefit from tax-deferred or tax-free growth. Take advantage of any employer matching contributions.
5. Invest More Aggressively
Invest more heavily in stocks vs bonds and cash to earn higher average annual returns. Reinvest dividends and interest to compound growth. But maintain an appropriate asset allocation for your age and risk tolerance.
Alternative Strategies if Your Net Worth is Low
What if you are approaching retirement age but realize your net worth is well below the recommended targets?
First, don’t panic. You still have options to boost your preparedness.
Here are some alternative strategies to consider:
Delay Retirement a Few Years
Keep working and saving a while longer. This allows you to continue building net worth and delay tapping your retirement savings. It also results in a higher Social Security benefit when you do start.
Relocate to a Lower Cost Region
Moving to an area with lower living costs can instantly reduce your retirement spending needs. Some great low cost regions include the Southeast, Southwest and Midwest areas of the U.S.
Downsize Your Home
Sell your family home and rightsize to a smaller, less expensive house or condo. Use the proceeds to pay off your mortgage and bolster retirement savings.
Rent Out Rooms
Generate rental income by renting out a spare room or basement apartment in your home. This provides extra monthly cash flow in retirement.
Work Part-Time
Finding a part-time job in retirement provides income to supplement savings. It also gives you social interaction and activity.
Relocate Overseas
Relocating to a country with lower costs like Mexico, Costa Rica, Portugal or Thailand can drastically reduce living expenses. This makes your net worth stretch further.
Tap Home Equity
Withdrawing funds through a reverse mortgage or home equity loan/line can help close a retirement income gap. Use this strategy in moderation since it reduces home equity.
Key Takeaways
Estimating your target net worth for retirement takes research on your expected costs, income sources and a safe withdrawal rate from savings. While targets vary significantly based on age and spending, here are general guidelines:
To retire at 65 aim for a net worth of:
– 10x your ending salary
– $1 million if making $100k/year before retirement
To retire at 60 aim for a net worth of:
– 10-15x your ending salary
– $1.25-$1.75 million if making $100k/year
To retire at 55 aim for a net worth of:
– 15-20x your ending salary
– $1.5-$2 million if making $100k/year
The keys are minimizing expenses, maximizing guaranteed income sources and using conservative withdrawal rates from savings. Retiring comfortably generally requires at least $1 million in net worth.