How Much Money Do I Need to Retire?

Retirement is a universal goal among people in the workforce—and many hope to achieve it early. According to a recent survey, the average age of retirement in the United States is 62. While many hope to end their working years sooner than that, most Americans haven’t saved enough to retire when they’d like to. In fact, 78 percent of Americans say they’re concerned about not having enough money for retirement.

Some choose semi-retirement—meaning they’re still working, but not as often as they used to. They continue to work because they enjoy it or because they still need the income. Full retirement, on the other hand, means you’re financially free and no longer working at all. Some begin with a semi-retirement and then transition to full retirement once they feel they’ve saved enough or have fulfilled what they wanted to accomplish.

No matter your plans, saving for retirement is essential for covering your living expenses after you’ve stopped working. Retirement saving should be an integral part of your financial plan—even if you’re still in your twenties and thirties. The earlier you start saving, the more time your money has to compound and accrue returns. If you’re wondering how much money you need to retire or when to know it’s a good time to do so, this guide will provide you with concrete answers and formulas. After all, planning for your retirement is key to your long-term financial well-being.

How to Tell How Much Money You’ll Need

Determining how much money you need for retirement can be tricky. It requires a little bit of time to calculate, but it’s time well spent. Having a clear estimate helps you to plan better and save more consciously. To make sure you’re on track, consult an advisor to build a savings plan that works for you and your goals.

You can also use our free retirement calculator to see where you're at and how much more you need to save.

Once you have an idea of how much you need, you’re able to align your savings to achieve that goal. Luckily, a few key factors will assist you in figuring out just how much you need for your retirement—specific to your desired lifestyle and when you plan to retire.

Think About What Standard of Living You’d Like

Do you plan to travel extensively during your retirement or dine out several times a week? Do you hope to move to a lake house or retire at your family home? Will you play golf frequently or fly to Florida once per winter? Create a vision for your retirement. Imagine what your days, weeks, and years might look like. Jot down notes that will help guide your cost of living estimates.

Estimate Your Expenses

To calculate how much you’ll need in retirement, you need to consider how you plan to live and what those living costs will be. Depending on your vision for retirement, your living expenses might be similar to what they are now—or they might be more or less than your current costs. Remember that some of your expenses will decrease. For example, you’ll no longer need to sock away money for retirement or pay for the gas for your commute to work. If you move to a location with a lower cost of living, factor that in as well.

To make calculations easier, estimate an annual amount for each item.

Here are the expenses you’ll want to include in your estimations:

• Your home. Consider if your mortgage will be paid off or if you’ll need to allot money for a monthly payment. Don’t forget to include property taxes, house insurance, and occasional repairs or maintenance costs.
• Health care. Based on when you retire, you might be eligible for Medicare immediately, or you may have to cover the gap before Medicare kicks in. Some people also choose to purchase plans beyond what Medicare covers. As you age, it’s likely your health care costs will increase from what they are today.
• Travel. Do you plan to road trip across the United States or live in Spain for a month every year? Estimate how many trips you plan to take annually and budget for lodging, transportation, food, and entertainment.
• Basic living necessities. Consider groceries, household goods, dining out, and clothing.
• Utilities. You’ll still have to pay for monthly expenses like electricity, heat, garbage, water, and recycling.
• Transportation. Include gas, car insurance, car repairs, and extra savings for a new vehicle.
• Miscellaneous expenses. Make room in your budget for hobbies, gifts, entertainment, and charitable contributions.

Taking the time to jot down rough estimates for each of these categories will give you a solid indication of the annual amount you’ll need. Multiply that annual number by how many years you hope to live in retirement. For example, if you estimate that you’ll need $36,500 to cover your annual expenses and you plan to live in retirement for 27 years, your total estimate will be $985,500.

Consider Inflation

If you’re not planning to retire in the next few years, you’ll want to add the cost of inflation into your estimated expenses. Calculate your expenses in today’s dollars, then add the inflation afterward. While you won’t be able to predict the exact percentage of inflation, adding in an estimate will help ensure you’ll have enough saved. In general, in the United States, the average inflation rate is between 2 percent - 4 percent annually. If you budget conservatively using 4 percent annual inflation, your expense projections shouldn’t fall short.

Determine the Minimum Amount You'll Need to Live On

Based on your calculations of expenses plus inflation, you should have a good indication of how much money you’ll need to live on. It’s smart to include a buffer in your calculations so you feel confident that you’ll have enough — no matter how long you live or what unexpected expenses come your way.

Compile your estimated expenses to get the best idea of the minimum amount you’ll need to live on each year. This number will assist when you look at your income streams during retirement and how much you’ll need to save for the length of your retirement.

Consider What You’ll Do If You Realize You Haven’t Saved Enough

What happens if you get into retirement then realize you don’t have enough for your remaining years? There are three main approaches to solving this problem: decrease your spending, increase your earnings or do some of both.

Having a backup plan ensures you’re prepared for any scenario. Would you enjoy working a part-time job or creating a residual income stream? Is there something in your retirement lifestyle you could cut, such as the frequency of your travel or dining out? Knowing how willing you are to adjust your lifestyle or pick up additional income gives you an indication of if you should add a larger buffer to your retirement budget. If you don’t feel you’ll want to change your lifestyle, you may want to estimate more for your retirement now.

Calculations to Help You Budget For Retirement

If you’re still wondering how much you need to retire, you’ll find the following formulas helpful in determining exactly how much money you’ll need. As you look through these formulas, keep in mind the various income sources that you’re likely to have in retirement. Remember that you won’t just have your savings to lean on. Your retirement income could include a pension, social security payments, royalties, a trust, continued interest from investments like stocks and mutual funds, your IRA, and a 403B or 401K account.

The 25 Times Rule

This rule suggests that you need save 25 times your annual expenses in order to retire. If you have a good indication of your annual expenses, multiply that number by 25. For example, if you plan to spend $42,000 each year in retirement, you would need $1,050,000. According to some financial experts, once you’ve achieved this saving level, you can be financially free. By withdrawing a small percentage of your retirement savings each year, you’ll continue earning interest and returns on your money—allowing you to continue living on the initial amount you allotted.

The Multiply by 10 Rule

Some financial experts suggest a simple formula for calculating how much you’ll need in retirement. They recommend taking your final or expected final salary and multiplying it by 10. If you make or plan to make $74,000 at the time of retirement, you would need $740,000. With this nest egg amount, you would withdraw only a portion each year, allowing the rest of the money to continue accruing interest and value. Depending on your lifestyle and how many years you plan to be in retirement, this rule may have some limitations or drawbacks because it doesn’t take into account how much you plan to live on.

The 15 Percent Rule

The 15 percent formula works under the premise that if you save 15 percent of your income for a long time—beginning in your twenties and thirties—you’ll have enough saved by the time you retire. In general, saving this amount annually should give you enough to live off in retirement, if your expenses are reasonable and not extravagant. Instead of trying to hit a certain number, you’re diligently saving for many decades. The longer you save, the more your money accumulates market returns and interest. If you start saving for retirement later in life, the 15 percent rule may not be the best formula, as it could leave you without enough of a nest egg.

The 70 Percent Rule

To calculate your retirement number, some experts recommend estimating that you’ll need 70 percent of the average income from your working years for the number of years you’ll live in retirement. For example, if your average income throughout your working years is $55,000, and you plan to live for 25 years in retirement, you would need $38,500 (70 percent of $55,000) x 25 = $962,500. Other financial investors are more conservative, and suggest saving closer to 75%-85% of your average income for each year you plan to live in retirement. Again, you’ll want to consider if your lifestyle will remain largely the same or if you’re planning to spend more in retirement than you do now.

Determining how much to save for retirement—and socking away the necessary amount every month—can seem daunting. But if you have a clear goal and vision for your retirement, you’ll be more likely to follow-through with saving.

The best time to start saving for retirement is now. The longer you save, the more you’ll reap the rewards of time and accumulation. Once you start saving, your interest not only accumulates on your initial amount but on the interest itself. The compound return each year can make a difference in the tens and even hundreds of thousands of dollars. Don’t be discouraged if you haven’t started saving yet—the best time to start is now. In ten or twenty years, you’ll be happy you did!

Remember, too, that retirement is very individualized. Income level, lifestyle desires, cost-of-living, debt levels, and availability of funds from pensions and trusts all play a role in the ability to retire. Stay focused on your particular goals. Your retirement is designed entirely by you. Above all, it’s important to make a plan for your retirement—a crucial aspect of your overall financial life and goals.