How much money do you need to retire?

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Do you know how much money you need for retirement? Most people don’t. Without at least an estimated goal you have no idea if you are on track or not. You might not be saving enough – or you might be saving too much! Here’s how to estimate your retirement needs for your financial planning.

How much money do I need to retire?

Below is a step-by-step walkthrough of the steps you can use to estimate what your goal should be for retirement savings. If you’re not a do-it-yourself planner for your finances, we can help. Helping people understand these types of processes are a small part of what we do as financial coaches. Just reach out to us and let’s talk about how we can help you.

“How much money do I need to retire?”

That’s a great question that few people actually take time to answer.

Everyone above the age of 20 should go through the exercise of estimating their big financial goal needs. One of those biggest financial goals – for everyone – will be retirement. Sure, this will almost certainly need to be adjusted over time, but everyone needs a starting point. Without a goal you have no idea if you are anywhere near on track to attain the desired result.

Since retirement is not the only financial goal, but the one that all of us will need to deal with at some point, let’s focus there today. Here are the steps needed to figure out just how much money you need for retirement.

First step: Understand your cash flow (have a budget)

The fact that so few people budget tells me that most people don’t have any idea of their retirement needs. Having a budget not only helps you pay off debt and achieve other financial goals. It is also a key part of the retirement planning process.

Once you have a “today” budget you can look at it and make estimated changes for what it might look like once you’re retirement. Here are a couple common adjustments to consider:

  • Does your budget today have you putting $1,000/month into your retirement savings? If so, you should be able to remove that since in retirement you will be drawing down funds, not adding to them.
  • Does your budget have you paying $2,000/month for a home mortgage or other debt that you expect to have paid-off by retirement? If so, you can make that adjustment.
  • Do you plan to do additional travel when you retire? Take some time to think about that and how much it might cost in addition to your current living expenses.

On the flip side…

  • Do you over-spend your budget – specifically are you adding to your current debt? If so, that’s a sign that you need to adjust some spending or that you need a higher level of income.
  • Does your employer currently pay for your health insurance? If so, you definitely need to add a category to cover that future expense. You should also consider a second category beyond insurance to cover co-pays, medicine, and other potential out-of-pocket medical expenses.
Quicken 2017 Budgeting Software

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Those are just a couple of budget adjustments you might want to consider. Of course you need the budget first before adjusting, so if you don’t budget already, go get started! Here is a helpful post with three tips to successful budgeting.

My favorite budgeting tool is Quicken for Windows. I’ve used Quicken for many, many years and haven’t found anything else with as much flexibility – and budgets need to be flexible. There are some decent online tools but seriously, none match using Quicken. Quicken does now have an online interface similar to Mint, so if you prefer that option, it’s included in the one-time fee. Quicken is currently just $34.99 (April 2017) – one-time fee (unlike many online services) at Amazon. Click on my links here or the image to the right to see it on Amazon.

OK. For simplicity let’s say that you’ve decided your annual budget for a comfortable retirement – based on today’s dollars – is $80,000. Yours might really be just half of that, or it might be double that. Just pretend for a while though to help pull this all together.

Next step: How much will you get from Social Security?

If you haven’t checked on your social security records lately, go do that today. It’s very simple and another important part of proper retirement planning.

Our previous post on How to Estimate Your Social Security Benefits walks you through the process if you aren’t familiar with MySocialSecurity site and data.

Now, some of you will ask…

“Will Social Security still be around when I retire?”

None of us can tell the future of course, but the likelihood of Social Security failing is very low. It would be a political nightmare for whoever was in office. There may be some adjustments to it in the future, but we have no idea what those might be. So all we can do is work from the data we have today. If you really don’t trust that Social Security will be available when you retire, then just ignore this step in the process.

Total your Social Security benefits

If you are married be sure to look up the information on both of you. Then take the total of these two numbers and add them together. That’s how much you can expect to receive “in today’s dollars” for Social Security benefits.

Even though this is in “today’s dollars” you won’t have to worry about inflation eating away at this amount because it is automatically adjusted to keep pace with inflation. So the actual dollar amount you get will be higher based on how long it is until you retire, but the value (purchasing power) will be about the same.

Step three: Calculate the difference you need to supply

So we already decided in this example that we have an annual budget of $100k in today’s dollars. Let’s say that between two people in a marriage there is a combined monthly benefit of $3,500. That $3,500 per month is $42,000 per year.

Subtracting the Social Security income from the annual budget leaves us with a $38,000 shortfall. That’s what we need to provide on our own.

For people who don’t plan, or get off-track with their planning, covering this shortfall might mean postponing retirement. In an ideal situation retirees will have enough money saved toward retirement that they can live comfortably without having to work.

Step four: Calculate the total to cover the shortfall need

The 4% Rule

We covered the 4% rule in more detail in another post but here’s a quick primer: There is something called the “4% Rule” that most finance professionals use when estimating retirement needs. Simply stated the rule says that you can withdraw 4% of a diversified investment portfolio, adjusting each year for inflation, and have an extremely high chance of the money lasting for at least 30 years.

Here’s the free way we track and analyze our investments…

So a 65-year-old should be able to draw down their investments by 4% annually and feel pretty comfortable that the money will last them until age 95 – if not longer.

The 4% Rule in Reverse

Since 4% of anything is also 1/25th, that makes it pretty easy for us to do some math and work backwards toward a retirement savings goal.

All you need to do is take your shortfall and multiply it by 25. In our example we’re looking to cover $38,000 per year.

$38,000 times 25 is $950,000.

While that’s a pretty big number, it’s actually very achievable for many people who have at least 30 years until retirement. It’s only around $500/month invested earning an average of 9% annually. That’s what the average American spends on a car payment each month. So “average” people should be able to afford it just from knocking out the car payment. Every year you delay, that monthly requirement gets bigger and bigger.

It’s very important to start as early as possible. Not only does it give your money more time to compound (growth on top of previous growth), longer timeframes also help lower risk and increase the chances of higher returns.

Step five: The dreaded inflation factor

If $950k gave you pause earlier, you really won’t like this part of the article. Remember that all of these numbers discussed are in “today’s dollars”. Because of inflation, todays dollars will be able to purchase fewer goods and services. This is called inflation.

It is pretty easy to see the impact of inflation. Just look at this article from Fox Business showing the cost of common grocery items when the article was written and then the cost 5, 10, 20, and more years earlier. Or this article written in 2009 comparing prices to ten years earlier. You can also consider that it’s been 8 more years since that article, so compare those rates to today’s prices.

The Federal Reserve tries to manage inflation to keep it around 2% annually on average.

What does that mean for your retirement target? Well, the goal is going to be higher because of inflation.

There are a number of inflation calculators online – like this simple one that I like to use – so you can play with some numbers yourself.

Finally: What’s your total?

But back to our example numbers…

If you need the equivalent of $950,000 thirty years from now, and inflation runs at 2% annually, you’re really going to need about $1.7 million dollars.

Big number, right?

But it is achievable for many people – if they start planning and investing early. To achieve $1.7 million over 30 years with a 9% average annual return, you would need to invest $928 each month.

Yeah, it’s a lot of money. But if someone is serious about achieving a comfortable retirement, they can likely achieve this monthly savings goal.

The average car payment is about $500/month. The average dining-out budget for a family is $250/month. When most people first start using a budget they are surprised about the number of areas where they have “financial leaks” – money going out at rates they wouldn’t have guessed.

What if the goal just isn’t feasible?

There are certainly some cases that the numbers just can’t work out. The above might come up with too big of a goal in too short of a time. Then what?

First off, don’t panic. Secondly, don’t throw your hands up and think “then why bother?”

This is a process and adjustments are a very normal part of the process.

So if it looks like, with all reasonable savings adjustments considered, you’re going to be short, there are a few next steps to take.

Consider delaying your Social Security benefits

You can start taking Social Security benefits at age 62 if you want. But if you wait, your monthly benefit amount grows substantially.

My full retirement age (FRA) is 67. If I wait the five years from 62 to 67 my monthly benefits check increases by 43%. Yes, that’s right – 43%! That’s a huge difference. If you can wait just the few years until your own FRA (which varies depending on when you were born) then the “shortfall” you need to cover from investments will be quite a lot lower.

Want even more of a bump in benefits? Each year – until age 70 – beyond your FRA that you wait to claim, the benefit amount increases by 8%. Waiting beyond my FRA until age 70 means that my annual benefits will be another 24% higher!

Instead of retiring at 62, by waiting until age 70 I (and you too!) can increase my benefits by 77%! That earlier estimate of $42k/year (if that was the age 62 amount) looks to be really close to $75k/year if you wait to retire at 70.

Consider supplemental income

Are the scenarios still looking tight when you wait to claim Social Security at age 70? No worries. There are more adjustments to consider.

There are a large number of retirees who continue to work. This can be a great way to close gaps on required income during retirement. Also, beyond the income perspective, some people just like to work during retirement. My father lasted about two years “retired” – golfing 5 days a week and tinkering in the yard – then he decided he missed working. This isn’t a bad thing and with only supplemental income needed, you have the option to do what you want.

You could even consider driving with Uber. Or starting a blog to bring in affiliate marketing income. (I’ve taken the Making Sense of Affiliate Marketing class.) Or go through our list of 11 online careers you can start with very little money.

Consider lower expenses

As mentioned earlier, there are some adjustments that need to happen to convert your current budget into a retirement budget. One of the adjustments that many retirees make is to lower their cost of living.

Downsizing your house is a great example. My family actually did this when we entered early retirement. Two people don’t need nearly the space that an entire family with kids might. Personally we downsized to about half the square footage. Our taxes are lower. Our utility bills are lower. Cleaning is so much faster and easier. The house cost WAY less than the old place.

There are a ton of benefits to downsizing.

Another idea is moving to an area with a lower cost of living. Every year there are updated lists compiled of some of the best places to retire. Here’s one from US News. Here is a top 10 list from Bankrate. Here’s another “places to retire” list from Forbes.

You’ll notice with these lists that these are pretty nice places. They aren’t just “the cheapest cities” but the best overall. Yes, they tend to be a lot more affordable than average cities but they also tend to have good healthcare and incredible quality of life features.

Lastly, you can adjust expectations

Most people don’t like this option, so I’m putting it last. But if all else fails, you can always adjust expectations of what retirement might look like. Maybe you won’t travel as much as you hoped. Maybe you won’t ride around in that shiny convertible. But that’s ok. Most people who make those types of changes find that it really doesn’t impact their happiness at all.

If making some adjustments allows you to never worry about money again, and to do whatever you want all day long, it’s a good trade-off.

Very important: Do it now!

If you made it all the way to the end here – great! Thank you! I appreciate you sticking with me. But don’t leave this article to go do something else then forget all about it. Grab a pen and paper and start working through this process. You’ll thank me later.

Or, if the thought of going through this on your own makes you cringe, let’s talk. Going through exercises like this is part of what we do in financial coaching. We can walk through this process with you, explaining everything as details as needed or desired along the way. Just fill out our contact form to start a discussion on what that type of engagement would look like.

I hope you found this helpful! If so, please share it on your social media or with someone you know who might benefit from it. Thanks!

 

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12 Comments

  1. Laurie @thefrugalfarmer May 2, 2017 at 1:16 pm - Reply

    Excellent post, Brad. We just checked our social security benefits about a month ago and realized we can survive on those alone in retirement – IF they still exist. This was a huge comfort. We are not planning on that income as we plan for retirement, but it’s nice to know it might be there. 🙂

    • Brad Kingsley May 2, 2017 at 3:43 pm - Reply

      Thanks Laurie! Yeah, we’re treating the SS income the same… pretend it isn’t there with our estimating. “Have a plan for the worst but hope for the best!” 🙂 It will be key to a lot of people’s retirement success though. I’ve worked with many people who’ve gotten a late start and will depend a good bit on that income.

  2. Gary @ Super Saving Tips May 2, 2017 at 2:31 pm - Reply

    Great article! The downsizing of expenses has been very important to me in retirement, helping to ensure that my nest egg will last. If you can lower your expenses before retirement, and funnel that difference into your savings, it can make a huge difference later on.

    PS – I’m a Quicken fan too!

    • Brad Kingsley May 2, 2017 at 3:45 pm - Reply

      Thanks Gary! Big AMEN on the pre-retirement downsizing! When my wife and I downsized three years ago, it was key to us being able to retire early. If we hadn’t made that change, there was no way we’d be able to stop working. Of course we were already close. People who aren’t anywhere near their goals can really escalate progress with an early downsize as you suggest.

  3. Mustard Seed Money May 3, 2017 at 8:59 pm - Reply

    Thanks for sharing!!! I recently was speaking to a co-worker about how much they need in retirement and we talked about the 25x rule. He was actually ready for retirement but hadn’t pulled the trigger because the thought he needed to replace income and not expenses. It was amazing to hear that he theoretically was ready for retirement and had no idea is beyond me.

    • Brad Kingsley May 3, 2017 at 9:09 pm - Reply

      Thanks for stopping by MSM! Yeah, it’s wild just how many don’t have a plan – and without a plan, they really have no idea how they’re doing. I can’t imagine just wandering through the financial landscape with no direction.

  4. Mary Nikko May 4, 2017 at 10:56 am - Reply

    How much you will need for retirement will depend on the lifestyle you plan to lead once retired. Will you travel? take up expensive hobbies? downsize? live frugally? relocate? It is also important to stay healthy in retirement. First because you will be better able to enjoy life and second, medical costs will most likely be greater if you are not healthy.

    • Brad Kingsley May 4, 2017 at 11:00 am - Reply

      Absolutely! That’s why having a solid grip on your cash flow to estimate your budgeting needs is *so* important.

      And yes, health is a great point for sure – thanks for mentioning it Mary!

  5. Liz@ChiefMomOfficer July 19, 2017 at 12:39 am - Reply

    I’ve found it hard to project future expenses, but that’s because my income, expenses, and family situation have changed drastically in the past 15 years. Hopefully now that things are a bit more settled, I can make more accurate projections. Although I still won’t project social security until I’m much closer to collecting-I’m sure the laws will change a lot by then!

    • Brad Kingsley July 19, 2017 at 9:48 am - Reply

      Hi Liz. Yeah, our costs have finally stabled in the past three years now that we’re empty-nesters. I agree on the social security – something will have to change for it to stabilize. I’m sure we’ll see an increase in the tax or a lowering of benefits or both. Thanks for commenting!

  6. Sarah (Smile & Conquer) July 19, 2017 at 3:44 am - Reply

    Very thorough post about retirement income and an important reminder to think about this even if you still think you’re a long way out from retirement. One of the worst things you can do is wait to figure this out and not have enough time to correct things if your numbers are running up short.

    • Brad Kingsley July 19, 2017 at 9:49 am - Reply

      Thanks for sharing your thoughts Sarah! I totally agree. It’s a great exercise to perform earlier rather than later for sure. The longer you wait, the harder it is to correct course if someone is off track.

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