May 2024 · 9 min read
Planning for Retirement: How Much Do You Need?
Retirement planning doesn't have to be complicated. Here's a straightforward approach to calculate your retirement number.
The Simple Approach
Start with your current annual expenses and apply the 4% rule. If you spend $60,000 per year, you need $1.5 million to retire safely ($60,000 ÷ 0.04).
The 4% rule assumes you can withdraw 4% of your portfolio in the first year, then increase that amount by inflation each subsequent year, and your money will last 30+ years.
Account for Inflation
The money you'll need in 30 years is worth more today. If inflation averages 3% annually, an expense of $60,000 today will require $145,000 in 30 years. Build this into your calculations.
Sources of Retirement Income
Social Security: The average benefit is around $1,800/month. You can check your expected benefit at ssa.gov.
Pensions: If you have a pension, calculate its lifetime benefit.
Investment Portfolio: The remaining amount you need from your savings.
Example: If you need $60,000/year and Social Security provides $25,000, you need $35,000/year from investments ($875,000 portfolio at 4% withdrawal rate).
Rules of Thumb
The 25x Rule: Save 25 times your annual expenses. With $60,000 annual expenses, save $1.5 million.
The 70% Rule: You'll need about 70% of your pre-retirement income in retirement (accounts for lower taxes and no saving).
Start Early
The biggest factor in retirement readiness is time. Someone who saves $500/month starting at age 25 will have far more at 65 than someone who starts at age 45, even if the 45-year-old saves $1,000/month.
Use our retirement calculator to see how different savings rates affect your retirement date.