How Much Money Do You Need to Retire?

These calculations will help you figure out your retirement number.

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Saving for retirement concept
Alamy
By Tom Sightings

Do you need $1 million to retire, as some experts have suggested? Or is it $2 million for a retired couple? Or is it 10 times your current annual salary, or 12 times?

There are many ways to figure how much money you need in retirement, just like there are different methods to make money in the stock market. But here's the best method I've seen, which requires a bit of math but nothing too challenging.

First, figure out approximately how much you'll need to spend, either on an annual basis or a monthly basis. If you do it by the month, don't forget to add in expenses that only come once or twice a year, such as insurance bills, tax bills and vacation bills.

How do you estimate how much money you'll spend in retirement? You know how much money you're currently earning. So that tells you roughly how much you're spending now. It provides a baseline number for how much you'll spend in retirement. But there are adjustments:
  • Deduct the amount you've been saving every month. Obviously, after you retire, you won't be saving for retirement anymore.
  • Deduct what you've been paying in payroll tax since you won't have a paycheck anymore. You might also estimate a new income tax level, which likely is less than what you're paying now.
  • Deduct how much you'll save in taxes, utilities and other expenses if you're moving to a less-costly housing arrangement, either by downsizing, moving to a cheaper area or both.
  • Factor in your changes in lifestyle. For people who intend to travel the world in retirement, those expenses might actually increase. But for most people, the expenses will go down. You won't have commuting expenses, your clothing budget may be less and your grocery bill may even go down since you'll have more time to shop for sales.
  • Factor in any changes in what you'll spend on your kids. This is a number that varies widely depending on the situation -- and it may change over time -- but you still need to take it into account.
All these adjustments should bring down your cost of living significantly, by as much as 30 percent, or even 40 percent or 50 percent.
You have a lot of control over how you're going to live your new, retired life, and therefore you have a lot of control over your expenses.

Finally, factor in an adjustment for health care. A few people -- those who've been paying for their own individual health insurance -- might actually see their medical insurance expense go down when they join Medicare. But most people will likely spend more on health-related services as they get older. So you need to check your health insurance options and also do a realistic evaluation of your own health.

Financial experts estimate that the average person, after it all nets out, will need about 75 percent to 80 percent of their preretirement income to sustain their standard of living after they retire. But this is just a rule of thumb. Do your research, and then do the math to see how much retirement savings you need. Here's the math:
  • Add up the retirement income you'll receive on a regular basis -- again either monthly or annually -- from Social Security, a pension, rents or royalties and any other recurring income.
  • Subtract your income from your expenses. If your result is zero or negative ... congratulations! You have more than enough income. But in retirement, most of us will have more expenses than income, so we'll end up with a positive number that represents the income gap we need to close with our savings.
  • Now multiply the number of your yearly gap by 25. That gives you the amount of savings you need so you can withdraw the recommended 4 percent annually.
For example, suppose you'll spend $5,000 a month to keep yourself fed, clothed, housed and happy in retirement. You estimate you're getting $1,500 a month from Social Security and $1,500 a month from your pension, for a total of $3,000 a month. That results in a shortfall of $2,000 a month, or $24,000 per year. And $24,000 x 25 = $600,000. That's the amount you need in your individual retirement account, 401(k) or other savings vehicle to close the gap of $2,000 a month.

Like all the other numbers you project into retirement, these are estimates and averages. But you're probably not average. So by doing some homework, you can customize your own retirement plan and finance your own retirement lifestyle.

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.


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66 Comments

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alfredschrader

Having a solid plan is better than more money. For example, once retired you are not going to be driving to work every day, so you don't need two or more expensive cars. Sell the Cadillacs.
One low cost to operate and insure economy car is plenty. Buying a $200,000 Motorhome will deplete your funds. Instead lease one for a year, sow your oats, give it back.
Most insurance companies have different rates for retirees. Have your agent review your policy and get the discounts. These are just a few suggestions.

August 25 2014 at 5:58 AM Report abuse -2 rate up rate down Reply
rb

I have no where near $1 million in investments for retirement. But, I retired at 49 and my pension is 50k w/ a 3% annual increase. My wife's pension is 12k. We don't live rich, but we're doing OK.

August 25 2014 at 3:45 AM Report abuse rate up rate down Reply
toosmart4u

You will never have enough money if you keep voting republican. They are on a roll, take from everyone and give to the rich.

August 24 2014 at 11:09 PM Report abuse rate up rate down Reply
1 reply to toosmart4u's comment
gee.effwye

He's not too smart.

August 24 2014 at 11:53 PM Report abuse -1 rate up rate down Reply
fakeconomics01

It is a very good article by Tom Sightings - I agree with the assumption that we need around $1million to retire. I need to what states tax medications, food and other stuff.

August 24 2014 at 11:00 PM Report abuse rate up rate down Reply
fakeconomics01

I heard State of Oregon is very friendly to retirees - but I am trying to stay away from snow

August 24 2014 at 10:54 PM Report abuse rate up rate down Reply
2 replies to fakeconomics01's comment
gee.effwye

It doesn't snow much in the.Willamette valley. There is a state tax. If you're a Californian, please stay there.

August 24 2014 at 11:54 PM Report abuse -2 rate up rate down Reply
4 replies to gee.effwye's comment
Valerie

@ fake --- Just stay out of the mountains and high desert country. Bend is a city in Oregon that has been heavily promoted as an ideal retirement destination. But, Bend is in the high desert, and that area is bitterly cold in Winter and gets lots of snow, too.

Bend is an expensive place to live, and so are the coastal areas. Try looking in the smaller towns, inland, away from Portland and Bend. (Lots of rain in the Winter --- but, you don't have to shovel rain off your driveway and sidewalks. LOL)

On the plus side, Oregon has NO state sales tax on anything. (No self-serve gas, either.)

August 25 2014 at 4:40 PM Report abuse rate up rate down Reply
1 reply to Valerie's comment
gee.effwye

Tell you what Val. I think fake should stay in California and retire in the garbage he has voted for all those years. That's right fake, you dckhead. You people vote in the psychos and high taxes and giveaways at the state level.......now stay the hell put and realize the comsequences of your vote. Keep your crap out of my state.

Why do so many lefties jump ship from the mess you make and flee to red states....AND SCREW THEM UP TOO?!?!?!

It's your state dude. Keep it that way.

August 25 2014 at 9:36 PM Report abuse rate up rate down
fakeconomics01

I am still learning and don't know about tax rates on retirement income -

Taxes
Medical Facilities
Weather
Crime
Educated people, social life and surroundings

These are some of the factors that will influence my retirement.

August 24 2014 at 10:38 PM Report abuse +1 rate up rate down Reply
1 reply to fakeconomics01's comment
gee.effwye

Who cares....stay in California.

August 25 2014 at 9:37 PM Report abuse rate up rate down Reply
fakeconomics01

How Much Money Do You Need to Retire?----------------------------------------------It all depends on location - I say I will need about $8,000 per month and I am also considering to retire in Panama

August 24 2014 at 10:23 PM Report abuse -1 rate up rate down Reply
1 reply to fakeconomics01's comment
gee.effwye

Please do. Go screw up Panama.

August 25 2014 at 9:38 PM Report abuse rate up rate down Reply
jim.lapt

I think stevendy1 is really gay, and doesn't know how yo come out of the closet. Are you Stevie darling?

August 24 2014 at 7:57 PM Report abuse -2 rate up rate down Reply
1 reply to jim.lapt's comment
jim.lapt

to..oops I did a typo.

August 24 2014 at 7:57 PM Report abuse -1 rate up rate down Reply
jim.lapt

We both voted for Obama, because he approves of gay marriage. President Obama is doing a great job with America. Just look at the economy, it's booming now. Thank you president Obama. I can't wait for Hillary to get elected in 2016, so we can fix America the rest of the way. She's a sweetheart.

August 24 2014 at 7:41 PM Report abuse rate up rate down Reply
jim.lapt

I'm retired, my hubby works all the time. He's a pilot and makes six figures. We just bought a new A6 and a brand new double-wide as a wedding present. We have the big corner lot in our trailer park and all of our redneck neighbors are jealous now.

August 24 2014 at 7:32 PM Report abuse -1 rate up rate down Reply