Conventional advice tells you that, for retirement, you need $1 million to $1.5 million saved, or that you need 10 to 12 times your current annual salary.
For example, if you make $100,000 per year, you’ll need $1 million to $1.2 million saved for retirement.
Are these numbers and calculations good enough? Is there a better, more accurate way to figure out what you’ll need to save for retirement?
In this post, we’ll look into that and more.
Check out retirement calculators
There’s a huge number of them out there. I recommend trying a few different ones, that way you can compare and average out the numbers. They’ll ask you things like age, current savings, current income, future contributions, etc.
Here are a few of the better ones.
- Nerdwallet Retirement Calculator
- Vanguard Retirement Income Calculator
- Bankrate Retirement Calculator
- AARP Retirement Calculator
Using some or all of these calculators, you can probably get a good idea of where you’re at currently, how to improve, and where you’ll need to be at the end.
What are the factors?
There are a variety of different factors at play. You’ll have different expenses and different income levels, and some of those numbers won’t stay steady throughout retirement.
For example, a couple’s health care costs in retirement are said to be $275,000 (Source). However, not all of that will hit you in the first few years of retirement.
More than likely, you’ll have minimal costs in the beginning, and they’ll slowly increase as you age.
Where will you live?
This can be a huge variable in retirement. Its widely known that different areas of the country have a higher cost of living. San Francisco is more expensive than Lincoln, Nebraska.
Another important factor regarding your living situation is if you have a mortgage or not. No mortgage means fewer expenses, which is less going out of your pocket, and more that can be saved for the future.
Not having a mortgage can also give you some leverage. If you decide that your current home is too big and would like to downsize, you can use the proceeds from the sale of your previous home to, hopefully, buy your new one outright.
Living Expenses
We’ve talked briefly about health care expenses during retirement and we talked about housing. Without a doubt, these are the two largest expenses during retirement. There are a few more to consider, however.
- Transportation – did you relocate? Or do you have family in other parts of the country? Transportation and lodging need to be taken into account when figuring out your expenses for retirement, especially if you’ll be traveling regularly.
- Entertainment – you might be looking for something to fill your time. It could be filled with expensive hobbies or other activities. If you are looking for something to do, or are looking to start a hobby, be sure your budget will allow for it.
- Remaining expenses – the leftover expenses are ones you deal with right now (food, clothes, utilities, bills, insurance, etc.)
A budget is just as important in retirement as it is now, if not more so. Keeping track of your expenses and your income is very essential to your finances during retirement.
You often hear people in retirement say they are on a fixed income. What that means is they have lost their ability to earn more money. What they have is it. If you are spending more than your savings and your income allows, you are setting yourself up for failure.
Income
Your income from retirement could come from a variety of places.
- Social security – provided by the government. The normal advice regarding social security is that it shouldn’t replace more than 40% of your income. Meaning 60% should come from another place. Your monthly payout from Social Security does increase the longer you delay taking it, and the reverse is true if you take it early.
- Pension – these are becoming less and less popular as time goes on. They were huge back in the day when workers would stay with one company until they retired, but because people switch jobs so often nowadays, employers don’t want to take the chance. If you have one, consider yourself lucky.
- Retirement savings – more than likely, this is where the other significant portion of your income will come from. This is where having a financial advisor is beneficial because you have to use enough of your savings to afford your retirement, but not too much so you don’t run out of money. Tricky.
- Other areas – there can be other sources of income during retirement. You could have some dividend or interest income from your investments, you could work part-time to stay active and earn a little extra, or you could possibly have a rental property or several.
If you want to learn more about where your income could come from in retirement, click here.
Wherever your income comes from, it’s important to coordinate effectively so you maximize your current income without jeopardizing your savings.
What will you do in retirement?
How you spend your time will also have a huge effect on your expenses.
If you plan on spending most of your time with your grandkids, retirement could be more affordable than if you planning on golfing a few times per week. Although it could quite possibly be much more expensive than golf, we all know how grandparents are with their grandchildren.
If money is tight and you are looking for things to fill your day, there are many free or low-cost activities available to you.
- Volunteer – not only is this a free activity. You’ll feel useful, you’ll get to use your brain, and you’ll have a sense of community, all are shown to increase longevity.
- Go to the park – take a walk, bring a book, or just interact with nature and the community.
- Community center – not all municipalities have one, but go to your local community center or go to your municipality’s website. There you will find local events, most of which are free.
- Discounts – most places offer senior discounts. If you aren’t offered one, make sure you ask for it. This really could save you a lot of money on activities, food, etc.
How long will you live
The most depressing point in this post, but one of the most important. Unfortunately (or fortunately, depending on how you look at it), no one knows how long we are going to live for.
One way to get a little indication, but not really, is your family history. If your grandparents or parents lived into their 80s, 90s, or 100s, the chances of you living a long life are a little higher.
On the flip side, if most of your relatives passed away in their 60s or 70s, your odds of living into your 80s and 90s are lower.
However, this really is no indication on how long you’ll live for. One of the most important things you can do for yourself is to live a healthy lifestyle. Take a walk once or twice per day, do something daily that will engage your mind, interact with friends and people in your community, and eat better.
The 4% Rule
You’ve probably heard this before too. Here’s what it is. Once you retire, you withdraw 4% of your retirement savings every year. This is considered a safe withdrawal rate, as the withdrawals would consist mostly of interest, dividends, and unrealized gains from your investments.
Let’s say you have $1 million saved for retirement. The 4% rule would allow you to withdraw $40,000 per year. All else staying the same, you have 25 years worth of withdrawals using this method. Be advised that no growth was factored into this calculation.
Conclusion
I suppose you’d like an answer to the question we proposed in the beginning. Here it is. It depends. It depends on your current and future expenses, it depends on where you’re income will come from, it depends on how much income you expect (outside of retirement savings), and it depends on how you live your life during retirement.
Most importantly, you need to work with a financial professional, ideally someone that specializes in retirement planning.
To learn more about retirement planning and for our disclosures, visit www.crgfinancialservices.com.
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com
…it all depends 😀 I think that the decision is largely a function of what quality of life you want in retirement e.g. if you want to do a lot of travelling then you’re obviously going to need a lot more. It also depends on what other forms of passive income you might have. I think the 10-12 times gross household income figure is quite a good initial target to aim for. As you get nearer retirement you’ll figure out you’re actual requirements
Good point! Until we have a better idea of what our actual expenses are going to be, are savings target is just an educated guess. And you are right, people who plan on traveling will definitely need more than people who don’t. Thanks for the comment!
It depends on how financially free you are in your younger years. Where you can set a portion of your earnings to your retirement plan.
Glad to come across this post, thanks for pointing out the factors to which we can determine a rough estimate of how much is needed for a comfortable retirement. Among all factors that you have mentioned, determining how long you live definitely was a bit funny, although true. Retirement is something we should prepare at an early age, as we know it cost so much, it makes it easier to reach that kind of amount if we start saving early for it.
It can be difficult when approaching that question because who really knows. There’s a fine line between planning like you’ll live to 100, but also enjoy the money you’ve worked so hard to save before you pass. Tough position to be in. I’m glad I have a few decades to think about how I’ll approach that.