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How much money do you need to retire? In this article I’m going to help you figure out what that magic number is to reach retirement.
We all plan to retire at some point in our lives. For many, the retirement age to get most of your social security benefits will be at the age of 67.
The quality of your life past that age relies on how much you have saved in retirement and what passive income streams you’ve been able to set up.
Relying on social security? Don’t.
If you are relying on social security to take care of you, you are headed straight for trouble.
In the future, social security may not be able to pay you the full amount you have earned.
In fact, the money you’re putting into social security right now isn’t even going into your account. That money is being used to pay out current retirees.
If that doesn’t make you motivated to save for retirement, then nothing will.
Even if social security does pay you the full amount, it won’t be enough to live a comfortable life.
And with only half of Americans even bothering to save for retirement (source), it’s clear to see how many of us are in trouble.
Here are some of the factors involved in determining how much money do you need to retire.
Factor #1. How long you will live.
If your parents and grandparents lived to an old age, you might live that long too. With that in mind, you might need to plan for a 35 year retirement rather than a 20 year one.
If there’s a history of certain costly ailments in your family then you will need to assume you’ll fall prey to it as well so you should adjust your retirement savings goal accordingly.
The longer you live also means the more you will need to spend on medical care. And as I’m sure you’re aware health care costs are rising at an alarming pace.
Factor #2. What quality of life you want.
The quality of your life in retirement will depend on how much money you have saved up in your 401k.
If you plan on traveling during your golden years you better have the bank account to justify it.?
If you will want to buy a car some time between your 60’s and your 80’s then you will also need to have money for it in your savings account.
The price of everything will continue to go up every year. This includes the cost to fill up a tank of gas (if gas cars even exist in the future) and the price of food at the grocery store.
Just because you spend $150 on gas and $300 on food now doesn’t mean that’s what you’ll spend in retirement. Take these increases into account in your planned retirement budget.
Factor #3. What your mortgage status is.
Do you plan on having a mortgage after you retire? If you’re renting now and plan to continue renting, you will be paying rent throughout your whole retirement.?
Sure, you won’t have to deal with property taxes, insurance and maintenance costs, but you will be paying rent forever.
The savings you get now will not make up for the many years of rent you’ll be paying during retirement while others have completely paid off their homes.
Another reason not to rent is that rent prices will continue to go up, even while your retirement budget will not.?
Mortgages, on the other hand, are a fixed payment for 30 years and then $0 after it’s paid off.
Factor #4. How the stock market is doing.
There are countless calculators online that will help you figure out how much you need to be saving to reach your retirement goals.
In fact, I have one such retirement calculator below!
What these calculators can’t do is tell you the rate of return on your money.
If you do well and get a steady 9% return, you should be fine. But if it’s not going much more than 2%, you’re in trouble.
So how do you know how much your money will grow? You don’t.
So when you use these calculators make sure and change the return rate around to see how that affects your retirement goals.
How much money do you need to retire?
So how much do you really need to retire comfortably?
There are two popular ways to calculate how much to save for retirement.
You’ll notice each method yields the same answer.
The multiply by 25 rule.
One method of calculating your retirement number is to take 80% of your current expenses and multiply it by 25.
This will give you a rough estimate of how much retirement savings you’ll need saved up to retire.
Using this retirement formula, say you spend $62,500 per year.
80% of that means you’ll need to live on $50,000 per year.
Multiply that by 25 and the answer to how much money you need to retire is: $1.25 million.
Keep in mind that this method of calculating your retirement needs doesn’t take into account the stock market, major life expenses or social security.
The 4% withdrawal rule.
The 4% retirement rule says you can withdraw 4% of your retirement every year – without a substantial risk of running out of money.
With this rule, you can withdraw $4,000 per year for every $100,000 you have.
Using the 4% rule, if you want to withdraw $50,000 per year, you would need a nest egg of $1.25 million.
Go For A Test Run
In order to be successful with retirement, you need to do a few things first.
- 1. Create a budget (and stick to it).
- 2. Invest in your retirement regularly.
- 3. Have enough saved in retirement.
That last step is the crucial step we’re focusing on here.
So how do you know how much you need to save for retirement?
Actually practice living in retirement. Right now.
Your retirement expenses might actually be less than your current expenses.
- They’ll use their car less (no commuting to work).
- Won’t have to spend money on kids (they moved out).
- Won’t have a mortgage payment (house paid off!)
To figure out how much you might need to live off in retirement, use 80% of your current expenses.
Regardless of what you plan your retirement expenses to be, go for a test run and see whether you can live on this amount.?
Try it out for a couple of months. If you have trouble staying in budget for these two months, now imagine how hard it would be to stick to it for the next 25+ years.
Try this retirement calculator.
Are you on pace for a successful retirement? Try this retirement calculator to see when you’ll be able to retire a millionaire.
Enter your age, current retirement, monthly amount invested, estimated rate of return and amount you want to retire.
Then click Calc to get the age you will be when you reach your retirement goal.