How Much Do You Need to Have Saved for Retirement?

December 16, 2016

In many recent conversations, I’ve been asked “how much do I need to save for retirement?” The answer is always “It depends!” Do you want to plan to live until you’re 100 or are you going to project a short life expectancy because of serious health issues? Will you have no mortgage or debt and spend lots of time at the public library reading books or will you have a big mortgage and fly all over the world staying at luxurious hotels?

Your lifestyle choices matter A LOT. Given all the variables and uncertainty regarding how much someone needs saved/invested in order to retire comfortably, it makes sense to have some rules of thumb around that. So here are some varying thoughts on how much you might need to save for retirement:

Fidelity recommends that someone have 10x their annual salary saved by age 67.  They also suggests a timeline to use in order to get to that magic number:

  • By 30: Have the equivalent of your salary saved
  • By 40: Have three times your salary saved
  • By 50: Have six times your salary saved
  • By 60: Have eight times your salary saved
  • By 67: Have 10 times your salary saved

Aon Hewitt, a benefits consultant, suggests that you have 11x your final salary saved before you retire.

A long established rule of thumb in the financial services community is “The 4% Rule.” What that means is that you can take a 4% withdrawal from your final savings balance annually and increase the amount with inflation each year. If you have $500,000 in your accounts, you’d be able to spend $20,000 in the first year.  So for every $1,000 per month you want to spend in retirement, you’d need $300,000 of investments.

Charles Farrell, financial author, recommends saving 12x your final income.

An article in The Street tells Millennials that they will need $2 million in order to retire.

These are just a few of the countless ways that people can calculate their “magic number.” Personally, I don’t believe in magic numbers. How much you need to save for retirement is very dependent upon the lifestyle you want to live.

Conventional wisdom says that you’ll need to replace 70-80% of your current income in retirement to live a lifestyle similar to today’s. I’ve met people who will be perfectly happy at 40-50% because they will have paid off their mortgage and have been aggressive savers who have lived far below their means for decades and won’t spend much money in retirement. I’ve met others who have plans to see the world post-retirement and they’ve saved their whole lives in order to splurge during retirement, so they’ll need >100% of today’s income.

What can you do with all of this potentially conflicting information? Start to think about your retirement picture. Take a look at your current expenses and see what will still be there during retirement and what won’t be. Consider the cost of healthcare and that you’ll need to account for that since you probably won’t have company benefits kicking in a portion of the cost.

Run some retirement calculators to see if you’re tracking well toward a secure retirement or not. Google “retirement calculator” and you’ll get thousands of options. You can also use our retirement estimator as another tool to help you get a gauge on your progress. The next time someone asks me “How much do I need to save for retirement?” I will email them a link to this blog post…