How Much Do I Need for Retirement?

I’m sure you’ve seen many articles over time giving “great” advice on how much you need to save to have the retirement you want. I even shared a few last week.  Even though I’ve written on this topic before, I wanted to revisit it as it comes up quite often in the world of financial nerds such as myself.   

These articles have common themes to them. First, there is no consistent answer.  Many articles say things like “having 10 times your income.”   This might be more applicable to the 64-year old getting ready to retire, but what about the 30-year old who has her best income-earning years ahead?  Or, what about the retiree who will be spending dramatically in retirement? You know, because they don’t have to spend $200 a month on dry-cleaning and will switch from wearing suits to shorts and t-shirts.  

Plus, these articles that recommend to save more and more seem to all come from companies in this huge world of financial services.  These companies make more if you save and invest more with them. I think it’s safe to say there may be a bit of a conflict through them encouraging you to save possibly more than you need. But what do I know. I mean, I’m sure the pork industry created their “Pork- The Other White Meat” campaign out of the goodness of their own heart😉

Here’s the simple rule/guide/shortcut I use when someone asks me the loaded question of “How much do I need to retire?”  Oh, before I jump into it, you MUST know what you spend!  Once you know how much you spend currently, start reviewing this number in more detail to project out what it will look like in retirement. Again, maybe you won’t be dropping a lot on dry cleaning and lunches out. However, your health costs may be projected to go up since you won’t have the awesome workplace healthcare plan.

Next, check with Social Security to determine what you will be getting from them. Also, if you have a pension of any kind, add this number too.

Once you have the inflow and outflow numbers you can get to the real work. Simply, take the difference here and divide by .04 (4%). This will give you a very rough estimate of what your nest egg needs to be.

Here is a simple example. Your spending number in retirement will be $70,000. Social Security and other pensions will provide $30,000 of annual income. You need to fill in a gap of $40,000. $40,000 divided by .04 is $1,000,000. This .04 number follows the very general rule of thumb that is the 4% withdrawal rate.

Obviously, every situation is different and this is just a back-of-the-napkin type of exercise to give you a high-level sense of how much you need to save for your own retirement. Please take the time to talk to your Certified Financial Planner™ to determine the specifics for your situation.