People have been asking this question for decades, and yet, no one really seems to know the answer. Even retirement researchers can’t see eye to eye on a total amount, and that is mainly because there are a lot of factors to consider. So many, in fact, that there is no singular rule of thumb that applies to everyone.
The amount of money you need to save before retirement depends on a number of factors, including your current age, the age at which you want to retire (or have to retire), how long you expect to live, and the kind of retirement lifestyle you want, among many others. Of course, no one knows when they will pass away or if they will develop major health issues later in life. These “no one knows” variables make it even harder to estimate how much you’ll need.
Nevertheless, estimating a ballpark figure is still possible. In this article, we will talk about some of the best ways you can determine how much money you’ll need to retire, as well as how to start saving up for it.
How Much Money Do You Need For Retirement?
There are different methods you can estimate your income needs in retirement. Here are the most common ones:
The 70-80% Rule
Many retirement experts say that your retirement income should be 70 to 80% of your annual income before leaving the workforce. For example, if you make $100,000 now, your retirement income should be around $70,000 to $80,000 in order to live comfortably.
However, if the retirement lifestyle that you want involves travel, a recreational vehicle, a vacation home, or other large expenses, you would have to raise that amount significantly. On the other hand, if you expect to receive government benefits (Social Security, private pensions, etc.) or have other sources of income (a part-time job, a business, freelancing), you may be able to lower that percentage.
Retirement Expenses
The 70-80% rule can give you a good ballpark figure of how much you need to retire. Still, there are a lot of variables to consider, especially the lifestyle that you want to have after retirement.
That said, it is also important to create an annual estimate based on your current lifestyle and the changes that you want to make after you leave the workforce.
Here’s an example:
Ms. Smith is currently 45 years old and plans to retire at 65. She is a bank teller and drives to work every day. She lives a particularly modest lifestyle; eats out every once in a while, goes on vacation once a year, and spends a reasonable amount of money on shopping. To make this example easier, she is single and has no children.
Here are her monthly expenses pre-retirement vs. after retirement (estimations).
|
Pre-Retirement |
After Retirement |
What Changed? |
| Housing |
$1,200 |
$0 |
By 65, Mrs. Smith will have already paid off her mortgage.
|
| Transportation |
$150 |
$100 |
Mrs. Smith will no longer drive to work every day, thus lowering her
gas expenses.
|
| Food |
$200 |
$150 |
During retirement, Mrs. Smith will have more time to cook at home,
which reduces her spending on takeout and restaurant meals.
|
| Utilities |
$100 |
$130 |
The amount of time that Mrs. Smith spends at home will increase when
she retires, which can cause her energy and water consumption to go
up.
|
| Entertainment |
$100 |
$200 |
Mrs. Smith will have more time on her hands. She expects to go to the
movies more often, take up more hobbies, and go out with
friends.
|
| Health |
$0 |
$200 |
Mrs. Smith’s employer pays her health insurance now. After
retirement, however, she may have to pay part of her insurance as well
as out-of-pocket costs.
|
| Total |
$1,750 |
$780 |
|
As you can see, the cost of living can decrease after retirement. If Mrs. Smith will start to save for retirement at 45 to retire at 65, she needs at least $187,000 at the time of retirement to sustain her needs for 20 years. Alternatively, she would need at least $780 in retirement income. This is a very low amount but a realistic one for a single person with no mortgage.
Now, let’s see another example. Mr. Jones is 30 years old and plans to retire by 65. He is a partner at a big law firm and lives quite a luxurious lifestyle. He drives every day to work, takes two-week vacations several times a year, eats out at expensive restaurants once a week, and has a taste for designer goods. Unlike the previous example, Mr. Jones is married and has two children.
|
Pre-Retirement |
After Retirement |
What Changed? |
| Housing |
$2,500 |
$0 |
By 65, Mr. Jones will have already paid off his mortgage.
|
| Transportation |
$150 |
$100 |
Mrs. Jones will no longer drive to work every day, thus lowering his
gas expenses.
|
| Food |
$400 |
$200 |
The kids will have already moved out by this point, reducing Mr.
Jones’ expenses on food.
|
| Utilities |
$200 |
$150 |
Although Mr. Jones and his spouse will be staying at home more often,
they expect their utility bills to decrease because the kids have
moved out.
|
| Entertainment |
$1,000 |
$2,000 |
Mr. Jones plans to spend more on other forms of entertainment, such
as golfing, sailing, and spa days.
|
| Travel |
$200 |
$2,500 |
Mr. Jones and his spouse want to take vacations more frequently
throughout the year.
|
| Health |
$1,200 |
$2,000 |
Mr. Jones pays for private insurance for the family, separate from
his employer-sponsored insurance. He will continue to do so after
retirement and may experience an increase in health expenses due to
medication and other out-of-pocket costs.
|
| Total |
$5,650 |
$6,450 |
|
In this example, the retiree’s cost of living increased after retirement instead of decreasing. This is due to Mr. Jones’s desire to spend more on recreation and travel, which are two of his main goals for retirement.
If Mr. Jones were to live up to 80, he will need $1,161,000 at the time of retirement or at least $6,540 per month in retirement income to live the lifestyle that he wants.
To summarize, here are the following circumstances that can cause retirement expenses to increase and decrease:
| Increase |
Decrease |
-
Refinancing a mortgage or buying a second home
-
Losing employer-sponsored health insurance
-
Traveling more frequently
-
Spending more on food and entertainment
-
Developing an illness, disability, or injury
-
Making major lifestyle upgrades, such as renovating, buying a
second car, or relocating to a more expensive location
|
-
Dependents moving out of the house, which results in lower food
expenses, utility bills, allowances, etc.
-
Driving less frequently
-
Cooking at home more often
-
Completing payments on the mortgage
-
Downsizing to a smaller home
-
Selling excess vehicles, leading to lower expenses on gas and
maintenance
|
What If You Take Out a Reverse Mortgage?
A reverse mortgage is a type of loan that allows you to access your home equity. It is only available to homeowners that are 62 years old and above, and one of its goals is to help retirees increase their retirement income.
In a reverse mortgage, the lender pays you instead of you paying them. And if you are still paying off the mortgage, future payments become optional.
If you plan to take out a reverse mortgage as a way to increase your retirement income, you may have to save less to be able to retire. For example, you want to save enough money to last for 20 years after retirement. Here’s how much you need to save with vs. without a reverse mortgage:
|
Without A Reverse Mortgage |
With A Reverse Mortgage |
|
Estimated retirement expenses per month
|
$6,000 |
$6,000 |
|
Estimated retirement income per month
|
$2,000 |
$2,000 |
|
Reverse mortgage proceeds per month
|
$0 |
$1,500 |
| How much you need to save by 65 |
$960,000 |
$600,000 |
A reverse mortgage can help you budget your retirement income more easily. If you want to find out more about reverse mortgages, contact our reverse mortgage specialists here.
How to Save For Retirement
There is no golden standard on how to save money for retirement. Everyone has different goals, income levels, expenses, and lifestyles. With that in mind, you need to choose the best way to save for retirement that works for you.
Here are several formulas that you can consider:
The 25% Rule
With this rule in place, you should start saving 25% of your gross income every year (or every month). Twenty-five percent sounds like an impossible amount, but this includes your 401(k) contributions, investments, and other types of retirement savings.
Expected Expenses Minus Retirement Income
For example, your expected retirement income is $5,000 a month. You expect to receive $2,000 from pensions and government benefits. The remaining $3,000 will come from your own savings. This means that if you want to live comfortably for 20 years after retiring at 60, you need at least $720,000 in your savings.
If you are 35 now, you need to save $28,200 every year to meet your retirement savings goal.
The Bottom Line
How much money you need to retire depends on how you plan to live during retirement. Moreover, how much money you need to have by the age of retirement depends on the benefits and pensions you expect to receive after you leave the workforce. By estimating your income and expenses during retirement, you can come up with a ballpark figure on how much you will need to retire.
However, don’t forget to consider unexpected expenses that may arise as well, such as medical bills and emergency repairs. The same goes for senior care or long-term care if ever you will need it in the future. To prepare for these circumstances, you have to have an emergency fund as well as insurance aside from your retirement savings.
If you want to read more about financial tips for retirees (or future retirees), visit our knowledge base here and learn how you can thrive in retirement.
