How Much You Need to Retire: The Ultimate Guide

How much do I need to retire?

It’s one of the most important questions to answer in your financial life. The answer to this question informs how much you need to invest every month, what you should invest in, and what your lifestyle will be like in your golden years.

But when retirement is so far away, it’s hard to figure out exactly what you’ll need to save. There are several variables in play, including your expected retirement spending, investing time horizon, desired lifestyle, income sources, and more.

In this article, we’ll help walk you through exactly what you need to know to figure out your retirement income number, including how to reverse engineer how much you need to invest each month, what to consider when planning for retirement, and ways to boost your retirement savings right now.

What is your desired retirement lifestyle?

Before you can begin to calculate how much you need to retire or set retirement savings goals, you need to figure out what you want retirement to look like. This means asking yourself a few poignant questions about what you want from your golden years and what your main retirement goals are.

Here are a few additional questions to ask yourself to help find the answer to the big one: “How much do I need to retire?”

• Will you travel a lot?
• Will you downsize?
• Do you have any large one-time purchases (RV, boat, etc)?
• Will you go out a lot?
• Is your house paid off?
• Will any children be living at home still?

The goal is to come up with a picture of the type of life you want to retire to. This can help give you an idea of some of the expenses you’ll need to account for when planning your retirement nest egg.

What are your (estimated) annual retirement expenses?

Retirement is not an age, it is a number.

And to figure out that number, you first need to figure out what your expenses will be in retirement.

For many, it’s hard to give exact figures, as retirement might be 20+ years away. But here is an exercise you can go through to get an estimate of your future retirement expenses:

Step 1: Create a retirement budget

Based on your answers to the retirement lifestyle questions, you can put together a hypothetical retirement budget. Don’t worry, we’ll adjust for inflation in the next step.

You’ll want to take account of all of your potential fixed and variable costs, and account for healthcare costs as well. Here’s an example of what it could look like:

Spending	Planned
Groceries	$700
Gas	$200
Restaurants	$300
Entertainment	$100
Spending cash	$250
Clothing	$100
Household	$100
Misc	$100
Bills
Property taxes/insurance	$900
Electric	$200
Medical	$500
Natural gas	$100
Water/sewer	$150
Garbage	$75
Internet	$50
Car insurance	$150
Cell phone	$100
Savings
Holiday gifts	$200
Phone replacement	$50
Birthday/anniversary	$50
Beauty	$50
Vacation	$300
Home maintenance	$200
Car maintenance	$100
Car replacement	$200
Total Expenses	$5,025

In the above budget, the assumption is that the house is paid for, so only taxes and insurance are paid (usually every six months). Medical expenses include insurance costs and out-of-pocket costs, which may be supplemented by Medicare (if age 65 or older).

These numbers can vary by your desired retirement lifestyle, so make sure to run your own numbers using this exercise.

In this example, the retiree anticipates needing about $5,000 per month to retire. Next, we need to adjust these numbers for inflation.

Step 2: Adjust for inflation

Living in an inflationary nation, we know that future costs will be more expensive than present costs. So it’s important to factor that into your analysis. There are two ways to do this:

1. You can calculate inflation-adjusted returns when planning for retirement
2. You can adjust your retirement budget by inflation.

A retirement calculator can give you inflation-adjusted returns, so you can simply calculate your monthly expenses in retirement in today’s dollars, and the calculator will adjust your returns for you.

But a simpler way is to adjust the budget by average inflation using a simple inflation calculator.

If we assume you have 30 years left until retirement, we can simply input your retirement expense totals into the calculator, and input 30 years. It will calculate the value of those retirement expenses in future dollars (assuming inflation averages a similar amount).

For example, this budget requires $5,025 per month to retire. If we input that into the calculator, it says that over 30 years, $5,025 is the equivalent of $10,585.

This means you’ll need about $10,585 to retire 30 years from now with the same purchasing power as today.

Step 3: Build in a buffer

After adjusting for inflation, we now have an estimate of our monthly retirement income needs. But since the future is uncertain, it’s a good idea to build a buffer to your calculation.

If you add 15% to your inflation-adjusted budget, then you’ll have enough to retire (plus some extra) based on your projections.

If we calculate $10,585 * 15% = $12,172 per month

What are your retirement income sources?

Before we can calculate exactly what you need to save to retire, you need to consider what other income you’ll have during retirement.

Social Security 

Social Security is available to retirees that paid social security taxes throughout their working career. You need to have a minimum number of working years to qualify, and the amount you get is based on a complicated calculation based on 30 years of earnings.

For most, Social Security will supplement retirement income, but cannot replace it. The best way to figure out what your Social Security income could be is by going to the Social Security Administration website, creating an account, and looking up your estimates.

Once you know how much income you can expect in Social Security benefits, this is subtracted from your monthly income needed for retirement, assuming you’ll be able to collect when you retire.

Rental real estate

If you have rental real estate properties that are profitable, you can count that income toward your retirement as well. This means whatever amount you “take home” from rental properties can also be subtracted from your monthly income needed for retirement.

Additional retirement income

Keep track of any other income sources you might have in retirement, including pensions, royalties, business income, or even a part-time job. This will offset the amount you need for your retirement plan as well.

How much income will you need from investments in retirement?

After going through the above exercises (phew!) you should have a pretty good idea of what you need to retire. Here’s the calculation:

• Monthly income needed at retirement (inflation-adjusted): $12,172 per month
• MINUS
• – Social Security projected income: $3,000 per month
• – Rental income: $1,000 per month
• – Other income sources: $1,000 per month

Monthly income needed in retirement (from investments) = $7,172 per month

Calculating how much you need to retire

Now that you know you need about $7,200 per month in investment income to retire, it’s time to calculate what your total retirement account balance needs to be to retire comfortably.

The simplest way to do this is to use the 4% Safe Withdrawal Rule that was pioneered by Bill Bengen back in 1994. In short, he calculated the maximum amount you could withdraw from your retirement investments and have enough money for a 30-year retirement — in ANY market. This means he backtested against the Great Depression, Stagflation, Black Monday, and more.

Based on his research, you can “safely” withdraw 4% of your total investment portfolio in the first year of retirement, and then adjust for inflation in each following year. This is based on a balanced portfolio of 50% stocks and 50% bonds.

As it turns out, this makes the math very simple for figuring out the total investment balance needed to retire. Since 4% is 1/25th of a total portfolio, to reverse engineer this, we just need to take the expected annual spending and multiply it by 25.

$7,172 x 12 = $86,064 per year

Here’s the final number based on our hypothetical retirement budget:

$86,067 per year x 25 = $2,151,600 needed to retire

Figuring out what to save monthly

Now that you know how much income you need to retire (about $2.2M), it’s time to reverse engineer how much you need to invest every month to get there. You can use a simple investment calculator to figure this out.

If we check out Investor.gov’s compound interest calculator, we can input a few numbers to see how much we need to save to get to the $2,151,600 number.

Here are the assumptions:

• You have $0 invested today
• You have 30 years until full retirement age
• You will collect Social Security and other income sources when we retire
• Your investment returns will average 8% annually

Based on the calculator, if you invest $1,600 per month for 30 years at an 8% annual return, you’ll have $2,175,037.

But let’s say you’ve already started investing and your current retirement savings in your 401(k) account is at $50,000. This changes the numbers slightly:

Starting with $50,000, if you invest an additional $1,250 per month for 30 years at an 8% annual return, you’ll have $2,202,381.

It’s important to input your specific numbers into the calculator to see how much you need to invest every month to retire.

Related: How to save for retirement

Tips to prepare for retirement

As you can see, you need to take into account quite a few variables to get an accurate number for retirement. Some financial firms and advisors try to simplify this calculation and say your investments need to produce around 70% of your pre-retirement income to retire. But retirement is not based on your income, it’s based on your spending.

After you run through this exercise yourself, here are a few things you can do to improve your retirement planning:

• Max out your tax-advantaged retirement savings accounts. Taxes can be one of the biggest expenses of your lifetime, so maxing out your tax-advantaged accounts each year can quickly boost your retirement savings. Individual Retirement Accounts (IRAs) allow you to invest up to $6,500 in 2023, and up to $7,000 starting in 2024. Workplace retirement accounts, such as a 401k account, allow you to invest up to $22,500 in 2023, and $23,000 starting in 2024.
• Save your raises. When you get a raise, save a portion of that raise instead of spending the extra income. If you choose to invest part of your raise each time you get one, you can quickly ramp up your monthly contributions and get to retirement faster.
• Work with a financial advisor. To make sure you’re on track, it can be advantageous to work with a fee-only financial planner to help you build an optimized investment plan. Financial planners can help navigate the world of investing, but make sure you’re working with a CFP or other fiduciary to get the best level of service that puts your needs above their own.

FAQ

Can you retire on $1.5 million? 

Based on the 4% safe withdrawal rule of retirement, you can withdraw $60,000 from a $1.5 Million portfolio. If you can live on an annual income of $60,000 in retirement, then yes, $1.5 Million is enough to retire. But remember, if retirement is far away, you will need to adjust your needs for inflation.

At what age should a person retire? 

Retirement is not an age, it is a number. But there are some ages that are more favorable for retirement. If you retire after age 59.5, you can start withdrawing from your retirement accounts without penalty. And if you retire closer to age 67, you can get full Social Security and Medicare benefits as well. But the age you retire is up to you, your choices, and your ability to invest enough to get there.

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