How Much Do You Need to Retire?

Masterworks

October 12, 2021

How much do you need to retire? And are you on track for retirement? Here’s how to calculate what you need to live your golden years to the fullest.

While most Americans want to retire by 67, many of them have a long way to go. In a survey of 2,000 adults aged 40 to 79 with at least $25,000 in investable assets found that nearly two-thirds of 40-somethings have less than $100,000 saved for retirement. The average retirement savings for all American households is $65,000, and for those under 35, the average balance is less than $13,000.

It should come as no surprise, then, that 66% of Millennials don’t feel on track for retirement savings.

How much do you need to retire? And are you on track for retirement? To answer that question, you’ll need to answer a series of other questions first. Let’s break it down.

When Will You Retire?

First, you have to ask yourself when you plan to retire.

The age at which you retire significantly impacts how much you need to save. The longer you work, the less you’ll need to save. Remember, you’ll continue to earn an income the longer you work, which means you’ll give your savings more time to grow. Plus, your Social Security benefit will be higher and you’ll spend fewer years in retirement.

Also, keep in mind that while the rule of thumb is retiring at 65, you are not married to that number. In reality, this rule is only useful as it relates to Medicare—Medicare doesn’t kick in until age 65, which means most people delay retirement until at least that age.

However, this is a reason to delay retirement, not accelerate it.

Remember, Medicare was created in 1965. In 1965, the average life expectancy was around 70.11 years. Assuming you lived a perfectly average life in 1965, enrolling in Medicare at 65 and retiring at 65, you would only live for about five more years. In 2020, the average life expectancy was 78.81, which means retirement savings have to last almost three times longer than it did in 1965. That does not mean you’re guaranteed to die at 78—many people live longer than that.

Of course, your health and your job may not permit working longer. But as a rule, the longer you can work, the better off you’ll be.

How Much Will You Spend?

Second, you have to think about how much you’ll spend in retirement, as this will raise or lower your goal number.

The rule of thumb is that you should have 80% of your pre retirement income stashed in savings…but it requires a contortionist’s thumb. At this point, the rule is an anachronism, because it assumes a 20% decrease in spending based on:

Not commuting to work
Not paying into Social Security
No longer paying a mortgage

While you’re no longer paying into Social Security, the other two assumptions are outdated. These days, more than 20% of Americans over age 65 are working or looking for work in retirement compared to just 10% in 1985. Plus, retirees now approach the golden years as a time to have new adventures, at least in the first few years.

Basically, you’ll have to think about how much you plan to spend, which includes things like:

Basic expenses
Medical care (this goes up as you age)
Support for your kids
How much you plan to leave to your children or charity

In other words, plan on having more than just the basic expenses covered.

How Long Will You Live?

This one isn’t the most fun question to plan for, and unfortunately, it’s hard to know unless you have a fully functioning crystal ball.

However, most people err on the short side of the calculation, and that’s a serious problem once you’re already in retirement. If you plan your retirement based on living until you’re 80, your 81st birthday won’t be much of a celebration. Unless you’re in frail health going into retirement, your best bet is to plan on living about 25 more years—until age 90.

How Much Will You Withdraw Each Year?

Since you’re not necessarily earning an income in retirement (or at least, not an income you can predict decades into the future), you should try to save as if you’ll live entirely on savings. Then your income becomes a question of how much you withdraw from savings each year.

The rule of thumb is 4% each year, which is based on a 1998 Trinity College study. These days, that number is highly conservative for most people. Think of 4% not as the ideal, but as the minimum safe withdrawal. Also, this number was based on the assumption that 50% of your investments are equities, and if that’s not your portfolio, it doesn’t make sense to plan that way.