How Much Do You Need to Retire?

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couple at the beach | Image Source/Getty Images

If you’re getting close to leaving the workforce for good, you might be wondering how much money you’ll need to make it through your golden years. One of the best ways to have a happy retirement is to make sure there’s enough saved in your retirement nest egg. But how can you really know how much to set aside?

We’d love to give you a magic number, but unfortunately, it doesn’t exist. David Bakke, personal finance expert at Money Crashers, told The Cheat Sheet it’s important to look at the big picture. “How much you need to retire is really a subjective question, because there are lots of factors involved. Besides more concrete things like expected Social Security income and monthly bills, you have to think about the level of retirement you wish to live. Will you upgrade to a better home? Spend a lot on travel?”

We can’t give you a retirement number, but we can give you a cheat sheet for planning how much you might want to squirrel away. Here’s how to determine how much money you’ll need to retire.

Consider your lifestyle

What type of lifestyle do you plan to lead after you leave the workforce? The way you plan to live will determine how much you’re able to set aside. If you want to maintain your current standard of living, you’ll have to save a lot more.

Personal finance expert Andrea Woroch says it’s important to imagine what you want your future life to look like: “Do you plan to travel abroad? Do you have a large family and would like to help support your grandkids’ college education? Keep in mind, you can take steps to reduce your everyday living costs to stretch your retirement dollars. For instance, you can downsize your home and car payments by opting to move to a smaller house or condo or even to a less costly area that offers lower tax rates,” Woroch told The Cheat Sheet.

Pay attention to monthly expenses

Another factor to consider is your monthly expenses. Do you have recurring medical bills, high-interest credit card debt, or a mortgage? Scott A. Stevens, a financial adviser with California Wealth Transitions, told us financial obligations will have a significant impact on your retirement needs. “How much you need to retire all depends on what you expect or want to spend on monthly and annual expenses during retirement. The best way to determine this is to use a number based on normal living expenses, health care, travel, and potential long-term care needs later in life,” said Stevens.

Evaluate investments

Another thing that makes retirement planning tricky is we don’t know how long we’ll be alive. TIAA’s Pat Rowan, managing director for retirement income strategies and products, recommends dedicating a portion of retirement savings to a fixed annuity. “We recommend that individuals secure a portion of their investments in lifetime income. By securing some money in income that an individual can’t outlive, they can protect themselves from inflation, interest rates, trying to draw down their assets in a poor market environment, and a number of cognitive issues many people face as they get older. By securing a portion of their portfolio in lifetime income, they can also better figure out how much they need, and free up other parts of their portfolio to invest in riskier assets such as equities,” advises Rowan.

Break down the numbers

If you’re looking for a guideline for your retirement savings fund, Rob Drury, executive director of the Association of Christian Financial Advisors, says you should make plans to live on as much as 80% of your pre-retirement income. “A common rule of thumb is to plan on living off of 70% to 80% of one’s pre-retirement income. One can then take that annual figure and multiply it by 25, allowing one to withdraw 4% annually. As long as the retirement fund’s earnings keep up with inflation, this should adequately fund a 25-year retirement,” said Drury.

Read more: How to Avoid Going Broke in Retirement

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