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How Much Do I Need To Retire?

How Much Do I Need to Retire?

“Let’s be honest. I have enough money to never have to work again.”
— Emma Watson

Harry Potter star Emma Watson made news in 2010 when she said she was surprised to learn that she was a millionaire, with a net worth at the time of $32 million. Well, she’s expected by some to be 2017’s highest-paid actress, thanks to getting a cut of Beauty and the Beast global earnings, so she still doesn’t have to ever work again. But most of us are in a very different situation.

white dollar signs floating like clouds in the blue sky
Image source: Getty Images.

The average American needs to be socking money away for retirement. That’s clear. Less clear is the answer to the “How much do I need to retire?” question, as it depends on a bunch of factors. Let’s look at those factors and then review how you might figure out how much money you need for retirement.

Important factors

How much you need for retirement depends on the following factors:

Your expected expenses: If your home is paid off and your local tax rates are low, you will probably need less retirement income than someone who’s still making rent or mortgage payments and who faces steep tax bills. Your expected health costs will play a role, too. According to Fidelity Investments, the average 65-year-old couple will pay $260,000 out of pocket on healthcare during retirement. And don’t forget your discretionary spending — do you plan to travel widely in retirement? To play a lot of golf? If so, you might need more income than someone who plans to do a lot of reading and jigsaw puzzles.

Dial labeled
Image source: Getty Images.

Risk tolerance: If you’re very risk-averse, then you’ll probably want to be aggressive in your saving. If you can handle some risk, then the stock market is where your dollars will probably grow faster than in other places. If that makes you uncomfortable, you could stick to “safer” alternatives such as CDs or bonds, but you’ll probably earn a much lower rate of return, requiring heftier investments.

Longevity: Rather obviously, if you expect to live a life that’s above-average in length, then you’ll need income for more years than someone with an average-length life. If you’re very fit and eat well and have many relatives who died in their 90s, you might want to aim for a big nest egg, as you stand a good chance of needing it to support you for a long time. Retiring at 65 and living to 95 means 30 years of retirement!

Inflation: Inflation is often ignored, but it can really shrink the purchasing power of your future dollars. If the income you live on in retirement is truly fixed and stays so for decades, you may face difficulties in your later years. Over long periods, inflation has averaged about 3% annually, enough to have something that costs $100 now cost about $181 in 20 years.

Green road sign pointing to retirement
Image source: Getty Images.

So… how much do you need?

There are various rules of thumb that can help you think about how much money you’ll need for retirement. One, for example, suggests that you aim for 80% of your income at the time of your retirement. Thus, if you earn $75,000 annually, you’d aim for an income of $60,000 in retirement. Of course, you might ratchet that up or down depending on your spending estimates.

Once you arrive at the income you expect to need in retirement, think about what it will be made up of. For example, if you’re looking for $60,000 in annual retirement income to start, list your known income sources. Perhaps you’re expecting $25,000 from Social Security and maybe you’re lucky enough to have a pension that will pay another $10,000. If so, then you need to make up the remaining $25,000. (You can get…

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