Trying to figure out how much money you will need to retire can be one of the most difficult financial questions to answer. It’s a critical question to address the older your get because while you may be able to live off of nothing but Social Security in your older age (millions of people do it), it won’t be very enjoyable. The average monthly payout is right around $1,300 these days, and that does not go far.
So beyond Social Security, how much money will you need? Unfortunately, since everyone’s spending habits are different, there’s no single magic number. A standard benchmark many people toss out is $1 million to $1.5 million, but a goal of a million dollars is sure to be a source of dread and panic for many people, especially the one in three Americans who have nothing saved for retirement at all. Use our Retirement Calculator to evaluate your current retirement savings plan.
If the million-dollar mark seems eye-popping and out of reach, throwing up your hands and deciding to deal with it later is the worst thing you can do. No matter how old you are, know that it’s never too late to put some savings back for retirement. If you’re not sure where to begin, there are some guidelines to help.
Retirement Planning. Source: Getty
Planning a retirement goal boils down to one task: estimate how much money you’ll be spending and then estimate how long you expect to need that money. Sounds easy, right? Here’s a look at some numbers in action.
There are three general guidelines for calculating a retirement goal:
Following the first rule, if you spend $20,000 a year, you’ll need about $500,000 to retire comfortably – a number that seems a lot more attainable than the $1 million mark. Going by the second rule (using a median individual income of about $35,000), you arrive at just over $600,000 need for retirement (70 percent X 35,000 + 25 years). If those numbers still seem like they are unreachable, it’s important to remember that a significant portion of that balance comes from your funds growing over time. You do not have to save $500,000 to have half a million dollars in retirement.
It may sound obvious, but keep in mind that your spending habits during retirement will be very different from your spending habits while you worked. That doesn’t necessarily mean spending less though. Work-related expenses will go away and you may have your home paid off, but costs for healthcare, expensive hobbies and travel will probably go up.
Any income you have will be different, as you’ll no longer be paying Social Security and Medicare taxes (effectively a 7.5 percent raise) (Related: Is Social Security Income Taxable?). You will likely be in a lower tax bracket, and you won’t be taking out retirement savings, which means your paycheck will go farther. However, the point of retiring is to be, well, retired, so many find that they’re not happy working even part-time.
In nearly any study, retirees say they spend more than they thought they would, so don’t plan on spending dramatically less than you do now.
It’s not a question anyone likes to address, but thinking about how long your retirement will last is another crucial factor towards hitting your goal. Did your parents, grandparents, and great-grandparents all live to be over 90 years old? Then you might want to plan on a little longer retirement if you’re in good health.
It’s also important to understand the role that Social Security plays as part of your post-retirement income. If you’re interested in seeing what you can expect to draw when you retire, the Social Security Administration has a number of calculators to help you figure out your potential benefits.
While knowing the exact amount of years you’ll need to fund during your retirement is impossible, you can make a fairly good educated guess with a little research. Here is what popular investment firms and resources suggest.
Figuring out how much you’ll need to retire is much more about hitting your individual goal than an arbitrary number that fits for everyone. If you want to live it up in retirement, traveling around the globe and eating lavishly, you’ll obviously want to have a goal on the higher end. If you’re comfortable with living low key, a target of around $500,000 will very likely let you live comfortably in your golden years.
There are a lot of “what ifs” when it comes to retirement, but you can still prepare by taking some basic steps. Retirement is often called “the most expensive thing you’ll ever do,” but if you take time to see what you’ll realistically need, you can plant ahead and retire with peace of mind.