How Much Money Do You Need to Retire?

by Jason on August 3, 2009

“I’d like to retire in 10 years”, Jack said as he sipped his coffee.  “How much do you think I’ll need?”

“It depends” I responded.

“Well, I read that people these days need at least a million or two to retire comfortably.  Is that right?” Asked Jack as he set his coffee on the desk and leaned forward nervously.

“Not necessarily.”  I responded.  Jack sat back and sipped his coffee again.  “You know, it really depends on a lot of variables Jack.”

“Like what?”

“Well, for example, what do you plan on doing in retirement?  Do you want to travel the world, play golf every day and buy a lake house?”  I asked.

“I would like to play golf a few times a week and take a nice vacation once or twice a year.  Other than that I live a pretty simple life.”

“OK, that’s a good start, tell me a little more.  Do you owe anything on your mortgage or have any other liabilities?” I asked.

“Yes.  I still owe on my mortgage and I have a home equity loan that I took out to help pay for the kids college tuition” Jack responded.

“We also have some credit card debt, probably about average for most people right?” Jack asked looking for some reassurance.

“Yeah, a lot of people have those things, but that will have an impact on you.  Have you saved anything for retirement or will you be getting a pension from work?” I asked.

“Yes, I have a 401k  I’ve been saving into for quite a few years and a couple of small Roth IRAs.  Plus I will get a pension from work.” Jack replied.  “But don’t I need 70 or 80 percent of my income in order to retire?  I’m not sure my pension and social security will be enough”

“There are no hard and fast rules Jack” I answered. “Every situation is different.”

“Well, how much will I need to retire then?”

Although the above conversation is fictional, it represents a fairly typical dialogue that I have on a regular basis.  Most people want to know a set dollar amount saved or percentage of income needed for retirement.

Unfortunately, it’s just not that simple.  Here are some things to consider when determining how much you’ll need for retirement.

Income & Assets

Take stock of your income.  Will you be receiving Social Security or a pension?  Will you be working after retirement at a part-time gig, doing consulting work or turning your hobby into a business in retirement?

Have you saved into your 401k or built up other assets that can be used for retirement.  According to a recent study by AARP, a safe withdrawal rate (or percentage you can safely withdraw from your principal without running out) is four percent.

Most people don’t pull out a steady percentage, but typically will do an “as needed” approach.  According to the study, If you have $500,000 saved up, you can safely withdraw $20,000 annually and not tap the principal.

Expenses & Liabilities

Income and assets are very important, but to me these are the bigger items to look at.  Take inventory of your expenses and liabilities.  Will you need to buy your own health insurance or will you protect against a possible need for assisted living or a chronic illness?

Do you plan on traveling the U.S., buying that golf membership or spending money on a vacation home?  These things will obviously dictate how much income you need?

Do you still owe on your mortgage and credit cards, or are you debt free?  If you have no debt and a fairly simple lifestyle you will be able to retire on much less than if you want to travel the world and you already have all kinds of liabilities.

Short Answer and Simple Calculation

The short answer to the question, “How much money do I need to retire?” is “It depends”.  Because every person and situation is different there are just no hard and fast rules to help determine what’s appropriate.

The simplest way to calculate how much you need is to add up all your sources of income and subtract out your planned expenses in retirement.  If there is a shortage, you will need your savings to supplement.

If the amount needed is greater than four percent, then you probably need to save more or push back your retirement date.  If that amount is less than four percent then you have done a good job of minimizing expenses and maximizing your income and assets and your retirement picture looks much better.

Consider these general guidelines as a starting point.  Every situation is different and unique.  If you want to delve more  in depth into this question of how much is needed, there are many great retirement calculators on the web that will also take inflation and your rates of return on your savings into consideration.

Bottom Line

Save more, spend less, get rid of debt and live a fairly simple lifestyle and you will be headed down the right path.

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{ 10 comments… read them below or add one }

JoeTaxpayer August 3, 2009 at 2:46 pm

There was a time when I looked at our gross income. 20% went to tax, federal state, SS. 20% to retirement savings, 20% to mortgage and property tax, 10% childcare, 10% college savings. We were living on 20% of our gross income.

This is a bit extreme, but 40% of our pretirement income will be more than we live on now, and some of that will come from Social Security.

Craig Ford August 4, 2009 at 6:57 am

I was getting ready to do a similar post …
I am a fan of the simple equation. Especially the younger you are I think the answer is to save as much as you can. When you get closer start working some actual numbers. I’m not quite sure how that will all work out, but it is essentially my approach.

Penny August 4, 2009 at 8:06 am

I still have a very long way to go toward retirement, but I don’t see myself spending more than I do now honestly. I’m just plain not that interesting.

There’s no reason to assume I’ll have a dramatic change of thought and start traveling, and partying when I hit retirement age. If anything, I hope to be spending less. Ideally I will be minus a mortgage by then.

Des December 10, 2009 at 11:04 pm

For me, percentage of my current income is not a factor. It is income/expenses all the way. The only question is “How much do I need to have invested to generate enough to cover my expenses passively?” The more I save and the lower my expenses get, the closer I am.

Jason December 11, 2009 at 5:16 am

Thanks for the comments! Des, the more you get that debt paid off (reducing expenses) and the more you save the easier that decision to “retire” will be. If you boil it down to that, it’s pretty easy really.
.-= Jason´s last blog ..Why You’re Off Track for Your Retirement (And What to Do About It) =-.

The Rat March 7, 2010 at 1:01 pm

Lovin’ this post! Did a thread just recently on something like it and it’s always interesting to see what comments come from a post like this.

Gordon March 23, 2010 at 9:57 pm

Seems to make sense. But every tie I search for “advise” about retirement income, the only answer that comes back is save more,spend less and invest more wisely. This is all well and good if you are 25 years old but what about if you are 55 and the years are short? Seems to me the only way to secure your retirement is earn more. Today, the only way, short of working at “BigMart” until you turn 85 yeas old, is start an online business. There is a learning curve but the possibilities are the most sensible and profitable.
.-= Gordon´s last blog ..The Baby Boomer Workforce Faces Big Debt Problem =-.

Jason March 25, 2010 at 12:49 pm

Gordon, that’s a great question about those being older and still trying to save for retirement. I know the answers sound basic and simple, but that’s because they are – we have to save more, spend less and invest more wisely. I would also add earn more through diversification of income streams etc. online businesses are a great idea.

I don’t think being 55 precludes you from doing the things mentioned above.

pension loan June 28, 2011 at 4:56 am

If you have a Pension valued over £20,000 then you qualify for a Pension loan, (it must be a Personal Pension or a frozen ex company Pension) The amount you can borrow will depend on which scheme you choose….

Oren Horack June 22, 2012 at 8:02 pm

I haven’t checked in here for some time as I thought it was getting boring, but the last several posts are great quality so I guess I’ll add you back to my everyday bloglist. You deserve it my friend :)

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