How Much Money Do I Need to Retire?
- Matt Erickson
- Apr 29
- 7 min read
Updated: May 8
How do I know if I am on track for retirement?
How long will it take to reach my retirement savings goals?
Am I on track to retire by age xx?
How do I know if I'm saving enough for retirement?
Regardless of how you phrase the question, I’m going to share some basic principles you can use to do your own calculations based on your situation to help you get a clearer vision for your family’s financial future and the timeline to get there.
IN THIS POST:
What Determines My Retirement Number?
Your retirement savings goal primarily depends on a mix of personal and financial factors:
Annual Expenses: What you expect to spend each year in retirement, adjusted for inflation.
Retirement Length: How long you’ll need your money to last, which could be 20, 30, or even 40+ years.
Income Sources: Social Security, pensions, rental income, or part-time work can reduce the amount you need to have saved.
Investment Returns: The growth of your portfolio before and during retirement will impact how much you need to save. The less your investment grows, the more you will need to save, and vice versa.
How Do I Calculate How Much Money I Need to Retire?
While it doesn’t factor in market volatility, unexpected costs, personal goals, or some other considerations (more on those later!), there is a rule of thumb to get a solid ballpark number. Remember, it’s not a complete answer, but it is a helpful guideline. It’s called the 4% rule and it answers the question, "how much money do I need to retire?
The 4% rule suggests that if you withdraw 4% of your retirement savings annually, adjusted for inflation, your portfolio should last about 30 years. This leads to a simple formula:
Retirement Savings Goal = Annual Expenses × 25
NOTE: There are certain circumstances in which I would recommend you not withdraw more than 3% annually and the age you want to retire at is a huge factor, so be sure to read to the end to learn about some exceptions that you need to account for in your calculations.
Applying the 4% Rule - Real-Life Examples
Here are three family profiles, each with different life stages, goals, and annual expenses. These help illustrate how your retirement savings needs can shift depending on your personal situation.
Example 1: 40-Year-Old Couple with School-Aged Kids
Annual Expenses: $125,000
Retirement Target Age: 65
Projected Social Security: $30,000/year
Savings Needed:
$125,000 - $30,000 = $95,000 per year needed during retirement
$95,000 × 25 = $2,375,000 total retirement savings needed
With 25 years to save, this couple can aim for a long-term growth strategy for their retirement savings to last them about 30 years in retirement, taking them approximately to age 95. They should also plan for college costs, inflation, and possibly scaling back lifestyle expenses after the kids leave home.
Example 2: 50-Year-Old Couple with College-Aged Kids
Annual Expenses: $140,000
Retirement Target Age: 65
Projected Social Security: $35,000/year
Savings Needed:
$140,000 - $35,000 = $105,000 per year needed during retirement
$105,000 × 25 = $2,625,000 total retirement savings needed
This couple is nearing peak earning years, but might still be managing college tuition or helping support aging parents and adult children. Now is the time to maximize catch-up contributions and streamline lifestyle spending to hit their target. If they reach their target savings goal, the principles of the 4% rule approximate that it will last them 30 years in retirement.
Example 3: 60-Year-Old Couple with Adult Children and Grandchildren
Annual Expenses: $155,000
Retirement Target Age: 65
Projected Social Security and Pension: $40,000/year
Savings Needed:
$155,000 - $40,000 = $115,000 per year needed during retirement
$115,000 × 25 = $2,875,000 total retirement savings needed
This couple may want to travel more, spend time with grandkids, or help other family members financially. Their plan should account for legacy goals, rising healthcare expenses, and potential market fluctuations. Again, if they reach their savings goal, the principles of the 4% rule approximate that their retirement savings would last them until about age 95 if they spend $115,000 or less annually in retirement.
Watch-Outs: Other Things to Consider
As I said, the 4% rule is a useful framework, but it’s not the full picture. Real retirement planning requires more precise calculations to cover the unknown factors, such as:
Inflation: As time passes, rising costs can erode purchasing power. We have seen and felt that in real time over the last several years. Your plan needs to factor in a variety of potential scenarios to be a successful one.
Healthcare: Healthcare costs can easily range from $5,000 to $15,000+ annually, especially before Medicare eligibility, and even one significant health event can quickly surpass that.
Investment Volatility: Markets don’t deliver consistent returns—down years can impact long-term success. In those cases, I generally would not recommend you withdraw more than 3% annually unless I felt certain that you had enough buffer to do so.
Taxes: Withdrawals from traditional retirement accounts are taxed—factor this significant tax expense into your net income needs.
Debt and Housing: Paying off mortgages or downsizing can significantly lower retirement expenses. Likewise, a second home will increase your expenses in retirement, so be sure to account for it.
Location: Where you retire affects costs significantly. In coastal or urban areas, the cost of living tends to be much higher. Taxes also vary widely between states.
Legacy Goals: Planning to leave an inheritance or fund grandchildren’s college expenses? Add that to your savings target.
One-Off Expenses: Think through your retirement years and potential expenses like cars, unexpected health events, weddings, dream vacations, home remodeling, and the like. If your retirement lasts 30 years, it stands to reason that you may purchase several new vehicles during that time. Given that a new mid-level car is about $50,000 (and much more if you decide to finance it), that is going to have a significant impact on your retirement number. Likewise, if you plan to pay for a child’s wedding, you need to factor it in. This is particularly true if the wedding takes place in a popular wedding location like Charleston. Any home remodeling, modifications, or improvements should also be factored in. If you’re staying in the same home, it is aging along with you, and the costs to keep up with it can add up quickly.
Long-Term Care: This one is tough because it’s hard to think about our own potential decline. It catches many by surprise, and the costs are much steeper than most realize. If you are an individual retiree, it may be a little easier for you to absorb and offset these costs by selling a home or other large asset. However, if you are married and unable to care for your spouse at home by yourself, you could suddenly face the financial weight of two sets of living expenses… yours at home and your spouse’s care in an assisted living facility, for example. Many are also surprised to find that in-home care can even surpass costs in a nursing home, depending on the level of assistance needed. In our personal and professional lives, we have watched this play out. Trust me when I tell you that when it gets to this point, money is the last thing you want to be thinking about, so please make sure you factor it into your calculations.
How Do I Know If I’m Saving Enough for Retirement?
Answering this question with accurate precision requires that we look at your current savings, future earning potential, the age you want to retire, the returns on your investments, and, therefore, how much you need to be saving annually… among other things. Well that’s not really possible to do here in a blog post, but I do have a quick reference chart that you can use to get a very generalized idea of how much you ideally will have saved for retirement based on your age. Please keep in mind that if you are planning for two people, you will want to combine your salaries for this. Also, I want to note that you may find other similar charts online where the amounts listed are less, but I would rather you overestimate your need rather than underestimate it. But, again, we are working in approximations, not precision, in these exercises.
Take a look at this chart, which is based on retiring at age 65, to estimate how much you should have saved for retirement given your current age:
So, for example, if you are 50 years old and the combined annual salary of you and your spouse is $150,000 annually, you would ideally already have saved 6x that for retirement, which calculates to $900,000.
Your Next Steps
Reading this blog has hopefully informed you, but the action you take based on that information is what will make all the difference. Start by going through your current and potential future expenses, and then do some calculations based on your situation. You can play around with the numbers and see the impact that different adjustments make to your final number and what it will take to achieve it.
I hope you’ll use the 4% rule as a starting point—but I don’t recommend that you stop there. Work with a financial advisor, revisit your plan regularly as your circumstances and goals change, and tailor your strategy to your unique needs. This can be particularly helpful when navigating the future unknowns and other things I mentioned in the “Watch-Outs” section above. Also, if you are calculating that you’re behind on your retirement saving, updating your investment strategy to get better returns without adding all the risk associated with higher returns can potentially help make up for savings shortcomings. And you already know that a fiduciary like me can help you with that!
If you have any questions, feel free to email or call me. If you’re ready to move beyond generalization into personalization and assurance when it comes to your retirement and investment plan, you can schedule a meeting with me here.
Sincerely,
