How Much Money Do I Need to Retire?Knowing how much you need for retirement also tells you when you can retire.

 

To figure out how much money you need to retire, one common piece of advice is that you need about $1 million — some sources suggest even more. In a recent Transamerica study, most workers estimated that they will need to have saved that amount by the time they retire; 29 percent believe they will need at least $2 million.

However, the same study revealed that very few workers used a retirement calculator or worksheet to make their estimate, and 53 percent of workers simply guessed an estimation of their retirement savings needs. So although it’s popular belief that you need one million in the bank to retire comfortably, that number is not necessarily based on real calculations, nor is it the right number for everyone.

You can spend your golden years living on less than one million dollars — and living well. All it takes is some careful budgeting and planning, assessing your lifestyle needs, and most importantly, learning how to make a budget as early as you can.

Related: 1 in 3 Americans Has $0 Saved for Retirement

Planning Retirement Savings Is About Spending, Not Income

Conventional wisdom emphasizes basing our retirement savings on our income level. However, what many people might not realize is that retirement planning isn’t so much about how much we earn, but how much we spend. The lifestyle we lead today can have an impact on how much money we’ve got left over in our retirement years.

“I have met people who make $30,000 take-home per month and still have no retirement savings,” said certified financial planner Jeff Rose of Good Financial Cents. “Keep your lifestyle in check and make sure you are putting money away every month. Set a benchmark based on what [you] need per year and plan to live to 100.”

More common advice says that we need 70 to 80 percent of our pre-retirement income to live well during retirement, but with some budgeting and lifestyle changes, it’s possible to live on less. “A person or couple that has no house payment or car payments can live off less than 70 percent,” Rose said.

Learn: 9 Signs You’re Not Saving Enough for Retirement

How Much Can I Save for Retirement?

Let’s look at a couple different scenarios based on allowing yourself a maximum spending limit of $30,000 per year. If you’re 30 years old and planning for retirement, you’ll have 35 years to build a nest egg if you want to retire at 65. With that dollar figure in mind, you’ll need to save $20,000 per year, which will net you $700,000 at retirement time.

Here’s how your nest egg will be affected by saving $20,000 per year for retirement starting at age 30 versus saving $25,000 per year starting at age 35.

How Much Can I Save For Retirement infographic

Living on Less: How to Make a Budget for Retirement

A savings in the ballpark of $700,000 can sustain you after retiring if you scale back your expenses. The Bureau of Labor Statistics reported that spending peaked at $60,524 per year for the 45-54 age group, then dropped to $34,382 per year for people 75 and older, indicating the trend of spending less and living simpler lives in the golden years.

Income tax and other career-related expenses including work wardrobe and gas for commuting decrease significantly in retirement. If you spent an average of $200 per month on gas or $500 per month on clothing, those expenses can turn into savings. For empty nesters, there are no more tuition bills to pay, and seniors older than 65 get a larger tax deduction.

There are some other ways to live well on less during retirement that won’t call for a 7-figure savings, and won’t subject you to suffering from frugal fatigue, either.

  • Driving less or using cheaper transportation: According to the BLS, the typical senior between age 65 and 74 spends $7,972 on transportation costs annually. But similar to clothing, transportation is considered a work-related expense and spending should decrease with age. Opting for an economy model car under $20,000 can save you on the base price of your car, maintenance and gas. Depending on where you live, using public transportation can be another option to cut expenses.
  • Downsizing your home: The best places to retire might not be where you lived pre-retirement. If you completed your 30-year mortgage before retiring, you’ve got no more to pay off on your house, but property taxes could be a major expense depending on where you live — and might make you think twice about what you consider the best place to retire. If you want to reinvest in new property, downsize somewhere cheaper, where property taxes and utility fees are minimal. Selling a home in California or the Northeast U.S. can allow you to buy something cheaper in Florida or Oregon and leave you with cash left over. For example, the proceeds from your home equity in Los Angeles — where the median price of a home is $506,800 — will leave you with $295,000 after buying a home in Salem, where the median price of a home is $211,800.
  • Cutting back on entertainment: Spending less on things like dining out is an easy way to cut expenses. But you don’t need to live on a diet of instant ramen just because you’re working with less than a million bucks in retirement. Be coupon savvy at the grocery store and buy only the necessities. Seek out low-cost activities with a senior discount, or clubs and groups aimed at your age group.

See: Best and Worst States to Retire Rich

Benefits and Investments

Most likely, your liquid savings aren’t the only assets at your disposal when entering retirement. The employer-sponsored savings you’ve accrued can make for a significant supplement to your retirement savings. It’s also helpful to know what tax bracket you’ll land in with your 401k. When using your retirement calculator, your expected rate of return should include your estimate on how much your retirement investments will net you in the years to come.

Investing in annuities can be a good option, but working with a trustworthy financial advisor is critical because big commissions can be made off of this type of investment and advisors might be inclined to give advice that benefits them instead of you. Short-term investments like CDs might be another option to consider in retirement. In two to five years, the dividends you earn can be a great help.

There’s also Social Security to consider. The average monthly benefit for a retired person in January 2016 is just $1,341. The National Academy of Social Insurance reported that the Social Security full benefit age is currently 66 for people born 1943-1964. For those born in 1960 or later, the full benefit age will gradually rise to 67. Early retirement benefits are available from age 62, but are reduced.

It’s important to note that experts advise that with current and forthcoming Social Security trends, it would not be wise to rely on Social Security benefits. According to Transamerica, baby boomers, Generation X and millennials are savvy to this and each generation expects a different retirement reality. Thirty-five percent of baby boomers surveyed said they expected to rely on Social Security whereas 48 percent of millennials and 40 percent of Gen X professionals most frequently expect their primary source of retirement income will be 401k, 403b or IRA accounts.

“Right now I would plan on getting 70 percent of the Social Security income we are being promised,” Rose said. However, if you’ve carefully budgeted your finances, even your Social Security can be a significant contribution to your income.

How Much Money Do I Need to Retire?

Estimating how much money you’ll need in retirement can be a difficult task. But there are some things you can do and budget for to help better prepare yourself and your finances. Here’s a starting point to find what your average retirement income should be:

  1. Start with the amount you’re currently making and figure out what your current expenses are. This is your baseline: Your current expenses.
  2. Factor in lifestyle changes, including cost of living adjustments, healthcare changes, travel plans and expenses, money you plan to spend on kids and grandkids, etc.
  3. Subtract what you’re currently investing each month in your individual retirement account or Roth IRA. Once you retire, you’ll no longer be contributing to an IRA.
  4. Factor in any pension or government pension you’ll be receiving as part of your income.
  5. Subtract the amount of taxes you’ve been paying on your current paycheck because you won’t be making those payments anymore.

All of these additions and subtractions can give you a better idea of how much money you’ll need in retirement. Using a retirement savings calculator can also help you prepare for your golden years.

Why Should I Retire Now?

There’s no hard and fast rule mandating 65 as the age to retire. More and more seniors are choosing to work past the retirement age and some are foregoing retirement altogether.

Fifty-one percent of surveyed workers plan to continue working in retirement, either part-time or full-time. Retirees might choose to work part-time for their current employer, venture into consulting or work limited hours elsewhere.

Social Security offers financial incentive to delay retirement: A worker who reaches the full-benefit age of 66 in 2015 gets an additional 8 percent for each year he puts off collecting Social Security benefits. If the same worker delays taking social security benefits until age 70, the benefit will be a significant 32 percent higher. Extending your working life can help in this regard because it lets your retirement accounts increase in value, and you’ll also shorten the number of years your savings must last.

Aside from financial reasons, continuing to work past retirement is conducive to a healthy lifestyle, allowing retirees to remain active and meet new people.

Retirement Savings Don’ts

Now that you have a better idea of what to do to save for your later years, review some key things to avoid if you’re looking forward to retirement.

  • Carrying debt: It can be liberating to be without credit card debt, an outstanding mortgage or a car payment. Try not to burden yourself with these lingering expenses when you retire. They can easily eat away into your precious savings.
  • Prematurely withdrawing your money: Stay disciplined and avoid penalties by leaving money in accounts that penalize for early withdrawal. Only access your 401k, 403b and other tax-deferred accounts once you’ve retired, to enjoy the full amount you’ve saved over the years.
  • Taking on too much financial responsibility: America’s baby boomers tend to risk retirement to financially support their adult childrenIf your children have hit financial hard times, it’s selfless and admirable to offer your help — but talk with your kids about how much you can reasonably afford. Too much can hit your retirement nest egg hard.
  • Depending on Medicare for all your medical expenses: People might think that Medicare will cover all their medical costs, but deductibles and co-insurance are a part of this. “You will want to have a Medicare supplement to cover the costs that Medicare does not cover,” Rose advised.

Once a rite of passage into the later part of life, retirement is now no longer guaranteed. But with some financial foresight and a realistic outlook you can retire or even figure out how to retire early. What your income and spending habits are today will influence what your retirement will look like tomorrow.

So, when asking yourself, “How much do I need to retire?” keep in mind that aiming for $1 million to retire on is a great goal to have. But retiring on less can still go a long way to living a happy, healthy retirement.

Ruth Sarreal and Paul Sisolak contributed to the reporting for this article.

Comments
  • broke as a joke

    Thats good to know because I am in the red and have 40 years to retire and make a million.

  • Guest

    I lived the good life. Travelled all around the world since 1976. I had the big salary. I have the big retirement nest egg. All I dream about is selling the mansion and buying a double-wide near a stream in Tennessee. I won’t need much. The internet. Movies. A few books. An old car. Some peace and quiet. Life is what you make of it. You can be happy anywhere, if you try. Everywhere I’ve been in the world, I have found people living in the most miserable poverty, yet they found ways to be happy. I think I can do it too. On a shoe string if need be. The million dollars is fool’s gold and a fool’s errand. You don’t really need that much to be contented or happy.

  • valsvet

    well, I am 64, still working and loving it, planning to work full time till 66-69 – depends on my health. Successfully invested my IRA money and 401 k, still contributing. My Social Security benefit will be around $2,130 a month at 66 but will improve dramatically if I keep working and delay till 69 or even 70. I have to support my daughter because her disability check is only $850 a month. My son is a Freshman at UC so I am responsible for tuition, books etc. , and he lives at home. We have three cars and spend a lot on gas, toll and insurance. But nevertheless i am optimistic about my future. My IRAs and 401-k should be around $700k if retire at 68. I am very good in investing and should easily earn 4%-5% without taking too much risk. So my Soc Security and investment earnings should be sufficient for a very good life. Oh, my house in Northern California will be paid off in 2022.

    • Ian

      You shouldn’t feel like you’re responsible for your son’s tuition, etc… help him out if you wish but he’s not learning to budget his own money. Those skills are required long after he graduates and you might run short if your mom doesn’t have saving, you have $700,000 and your house isn’t paid off.
      Look out for yourself (and wife & daughter), Junior will survive without your 100% funding.

      • Ian

        wife not mom

  • I fully expect the retirement age to be bumped up to 75 years old or more by the time I get there. Paying down debt, living within your means and saving for your golden years is certainly one part of the puzzle, but I’d better love the job I choose or I’ll end up hating the next 60 years of my life. My dream would be to find a job I enjoy so much that I do it for fun rather than money, but short of that, I’ll work my @$$ off and build passive income streams as quickly as possible to get out of the rat race. I’m lucky there’s a lot of good advice and opportunities to be had for young people these days.

  • EVE LYON

    NO TO LIVE THE GOOD LIFE WITH MEDICAL SO HIGH YOU NEED OVER TWO MILLION TO RETIRE. MY SS IS 692.OO A MO. WITH A 11 DOLLAR RAISE THIS YEAR, SIGH YES I AM 79

  • ROBERT

    What happed to the money congess took out s.s.and stop giving aid to countrys and take care of us at

  • ROBERT

    what happed to the money peoples pay into ss and died before retired

  • Jordy

    How come we never hear of WELFARE ,FOOD STAMPS,ETC. running out of money?????????

  • Jeff Stark

    Paul, you need to correct your article in one regard: you do not make more SS money by waiting one minute over age 70, that’s the cap. Waiting to 72 means you just wasted two years of the same thing you’d have made at 70.

  • Guest

    So….I don’t need a lot of money to retire, given I spend less money on entertainment and travel…..When I retire I want to be entertained by travel. Your thinking doesn’t allow retirees to enjoy retirement. If I’m making $100k at age 64, who’s to say that just because I turned 65 I only need $75k to live on? I appreciate your thoughts but reject your premise sir. Even if I save $1M that is still a 7.5% withdrawal rate each year. Most “experts” suggest if I take that high of a withdrawal that I will run out of money in 15-18 years. I guess if I work late and die early I’ll be ok.