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Wondering How Much Money You Need to Retire? (The Formula is Easy!!)

Figuring out how much money you need to retire is a challenge, to say the least. It’s not like budgeting for a once-in-a-lifetime vacation, where there are pretty fixed costs and you can plan almost every dollar you’ll spend. 

Retirement is tough to calculate because there are costs you can’t control and can’t even predict. But let’s look at the bright side and make the most of the factors we can prepare for. How much do you need to retire?

Related: How Much Should I Have In Retirement at 35?

Common Retirement Rules

Here’s a smattering of the general advice from some experts:

  • Fidelity estimates a person should have 10x their annual income saved by age 67. 
  • Dave Ramsey says to put 15% of your take-home pay towards retirement, although he does recommend saving more than that when you’re able to. 
  • Suze Orman, in her book The Ultimate Retirement Guide for 50+, advises you to stop thinking of retirement at age 55 and plan to work until 70. She’s also mentioned $5-$6 million as a target number. 

Key Questions To Determine Your Retirement Number

Deciding how much money you’ll need to be able to retire comfortably is a tough call. It’s a complex equation with no exact, perfect answer.

Wondering how much you need to retire? The retirement formula is easy!There are a few non-negotiable factors you’ll need to consider, though. 

  • How much will you spend per year in retirement?
  • What amount will your investments gain per year? 
  • How long will you live?

None of these questions have a fixed answer, but you can estimate reasonably well. 

Related: How Much Money is Enough? (And Can You Stop?)

How Much Will You Spend Per Year In Retirement?

Financial planners and retirement experts usually stick to this rule of thumb: 

Plan to spend about 80% of your pre-retirement income annually in retirement.

That’s a rough estimate, and I’d argue that you should be looking at your spending more than your income. After all, in personal finance, your income is only a small piece of the puzzle. But the 80% figure is a decent baseline.

Fidelity says to estimate between 55% and 80% of pre-retirement income as what you’ll need when you retire. That’s a broad range that allows for differences in lifestyle. Plus, a higher income means your actual need is lower (making $300K a year, you could get by on much less than 80%).  

Some costs are likely to increase in retirement:

  • Healthcare
  • Travel, especially early in retirement when you’re healthier

In other areas, spending may go down:

  • Housing is a big one; if you’ve paid off your house, you cut out a huge expense from your working years. 

So you might look solely at your income, but for a more accurate estimate, you should also examine your current budget. If you’ve never followed a budget before, now’s the perfect time to start. 

Learning how much you spend per month, no matter where you are in your career, will help you devise the most useful retirement numbers. Check out Top 20 Budgeting Tips of 2021 for ideas on how to make a budget. Then you can use your spending info to help nail down a good guess of how much you’ll spend in retirement.

Related: How Much Money Do You Need to Retire? (It Could Be Very Little!)

how much should I have in my 401kHow Much Money Will Your Investments Earn Per Year?

When deciding how much money you need to retire, you need to know how your money will grow between now and then. Most of us rely on the power of compound interest to multiply our savings into a reasonable retirement number. 

You can check SSA.gov if you expect to earn any money from Social Security. They have a Retirement Estimator to help you get an idea of how much income Social Security will bring you.  (Not everyone is in the SS system. If you paid into a separate pension system, such as TRS for teachers, check with them to estimate your future earnings.) 

For other investments, look at data on historical stock market returns.

You can learn from the past to help you make an informed guess about how much your money will grow. 

Stock market returns have varied over the years, of course. Some years the market is up and some years it’s down. You can test retirement calculators on plenty of financial websites like Vanguard or Fidelity, inputting your own numbers. 

You should plug in numbers such as:

  • how much you’re investing per year,
  • the ratio of stocks to bonds in your investments…

…and then see where you can expect your nest egg to be at retirement age. 

Don’t forget to account for any non-stock-market investments such as real estate. A rental property could add quite a bit to your income down the line. 

Related: How to Buy S&P 500 and Instantly Diversify Your Investments!

living choices - live wellHow Long Will You Live?

Soooo…unless you have a crystal ball, I’m guessing you don’t know exactly when you’ll leave Earth. That means…you guessed it, this part of the retirement equation is also a bit of a mystery. 

We have to make educated guesses. Look up average lifespans and factor in your family’s health and typical lifespan, then go from there. 

For example, as a 40-year-old white female, in 2020 I could expect to live another 42.1 years, to age 82. Race, ethnicity, gender, and current age affect where you fall on life expectancy charts. 

Be sure to consider things like how long your parents and grandparents have lived as well, since that can be an indicator for you. 

Of course, plenty of things will impact your lifespan.

  • People pass away at relatively young ages even in great health.
  • Others surprise us by living into their nineties with a wild and dangerous lifestyle! 

To protect yourself, plan for a long life when calculating your retirement needs. Better to be overly prepared than come up short!  

But don’t make yourself crazy with what some retirees call “one more year” syndrome. Yes, more money in retirement is in theory a good thing, but try to find balance. 

how to become richHow Much Does The Average Person Need to Retire?

If we simply get down to the basics here and ignore all the wild ‘what if’ variables, the basic answer for how much money you need to retire is actually quite easy. 

The median family income in the U.S. is $80,000. In most parts of the country, you can live quite well off of that amount of money. 

For retirement, the general rule of thumb for what you should have in your nest egg is 25 times your desired income. In the case of averages, that would mean our calculation would look something like this:

Nest Egg Needed = $80,000 x 25 = $2,000,000

So how much does the average person need to retire? 2 million dollars!

It sounds like a lot, but with an average inflation of 3% each year, that seemingly big nest egg buys less and less every year. So, it’s better to estimate a little big vs. small. Otherwise you’ll be living on cheap bologna and white bread when you’re 90!

Want to have more of an income in retirement? Then plug that number into the formula to get your nest egg target. Like I said, it’s a pretty simple calculation if you strip away all the crazy variables!

Calculating Your Target Retirement Number

If running rough calculations has left you feeling discouraged, don’t give up. You’ve got several “levers” to pull to get to your best retirement number.

You may need to adjust your lifestyle expectations to spend less in retirement. Or work a few years longer to beef up your retirement savings. Different actions can have positive impacts on your overall retirement picture. 

You can’t predict every possibility, such as health challenges you might face or whether you’ll need to support an elderly relative in your own retirement. But you can use basic calculations and averages to help you come up with a decent idea of how much money you need to retire. 

What about you? What’s your estimate? How much money do you need to retire?

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AUTHOR Kate Underwood

Kate Underwood loves reading, talking, and writing about all things in personal finance. She made the switch from her high-school teaching career a few years ago to become a full-time freelance writer and editor and can be found at kateunderwoodwriter.com.

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