How Much Do You Need to Retire?

By Miranda Marquit

One of the biggest concerns many people have is whether they will be able to retire. Figuring out how much you need to retire can feel like a daunting task. However, there are some steps you can follow to help you figure out an amount that makes sense for you.

Figure Out How Much You Need to Retire

Everyone has different needs in retirement. For some people, it makes sense to retire when they have $600,000. Others might not feel comfortable retiring until they have $2 million in a retirement portfolio.

Your retirement number is probably somewhere in the middle. If you’re trying to figure out how much you need to retire, consider the following:

What do you want to do in retirement?

Your first step is to think about what you want your retirement to look like. Do you expect to travel a lot? Will you have some type of business income or recurring revenue? Do you want to downsize your home? Should you live in a condo or apartment or buy a house?

Consider the activities you want to participate in during retirement. For example, maybe you want to be able to play golf three times a week and spend your evenings on your back porch, having a nice drink. Or perhaps you want to take local classes and the university and travel four months out of the year.

There’s no wrong answer. But you do need to think about what makes sense for you and the lifestyle that you’ll have. How much money you need to retire depends, in part, on what you expect that retirement to look like.

How much do you estimate it will cost?

Next, once you have an idea of what you want your retirement to look like, estimate what it will cost. This can be somewhat difficult since there’s a good chance things will cost more in the future. However, you can get a feel for what things will cost by looking at today’s cost and then adding more to it.

For example, a lot of inflation figures assume 3% annually. You can use an inflation calculator to get a general estimate. Perhaps you look at the lifestyle you want and decide it costs $4,500 a month. However, you’re going to retire in 20 years. An inflation calculator might tell you that you’ll need $8,127 a month to maintain that same lifestyle later.

On the other hand, you might figure that you won’t need as much later if you reduce your housing costs or if you plan to own your home by the time you retire.

Inflation calculators aren’t perfect, and you might think that’s more than you’ll really need.

What sources of income will you have?

Don’t forget to factor in your sources of income. For example, according to my Social Security statement, if I decide to begin taking benefits at age 67, I can expect to receive $2,473 per month. If I’ve decided that I probably need $6,000 a month, more than 1/3 of that amount would be covered by Social Security (assuming it’s still there).

You can also consider whether you’ll have recurring revenue and whether you have a nest egg that provides you with compounding returns. If you decide that you want to work part-time during “retirement” or get involved in entrepreneurship, that can reduce how much you need to have invested in your retirement portfolio.

Think about where your money will come from and how long it’s likely to last.

Do you care if you have any left over for your heirs?

The 4% rule is a general rule of thumb that says that your money is likely to last forever if you withdraw 4% a year. This rule assumes that you’re likely to see 7% annualized returns from your investments and that inflation will average about 3% a year.

Let’s say you assume you’ll need $8,000 per month to live the lifestyle you want when you retire in 20 years. That’s $96,000 per year. To meet the 4% rule, and if you’re not relying on Social Security, you’d need $2.4 million saved up for your money to last indefinitely.

But what if you don’t expect your money to last forever? What if you don’t care if you leave a chunk to your posterity?

Maybe you decide that you can take Social Security a bit early and get $1,500 per month, and you know you’ll have recurring revenue of about $2,000. If you don’t mind drawing down your portfolio until you pass, you could get away with a much smaller nest egg.

Bottom Line

For many people, how much they need to retire depends on many factors. Don’t assume that you won’t be able to save up enough or come up with enough cash flow to reach your goals. You might be surprised at what you can accomplish if you sit down and run the numbers.