Tips for Determining How Much Retirement Savings Is Enough

Elderly couple with canes climbing their way to retirement on their savings in the form of coins

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When it comes to retirement savings, asking someone you haven't met how much savings you need is like inquiring how long they figure it will take you to get to Los Angeles. They should respond with some basic follow-up questions like "Where are you now?" and "Are you driving or flying?"

Key Takeaways

  • Your current income is a useful starting point for calculating your retirement planning savings needs.
  • Determine how much you can expect from Social Security and defined benefit plans during your retirement.
  • Figuring out how many years you will spend in retirement helps you figure out how much of your savings you will need to withdraw each year.
  • Early-career retirement savers may plan on saving between 10% to 15% of their income, while those who start later may need to set aside 20% or more.

Key Questions to Answer

When it comes to how much savings you'll need for retirement, there are several key questions and considerations you should evaluate as you contemplate retirement, either with or without the assistance of a planner.

What Do You Envision for Your Retirement?

Does your ideal retirement life look a lot like the one you have now? Or would you hope to step it up a notch? Alternatively, you may crave the idea of an earlier retirement even at the expense of a lower standard of living. There's no right or wrong answer, but your anticipated retirement lifestyle is a critical component in answering the "How much savings will I need?" question.

What Do You Make Today?

Your current income is a useful starting point for calculating your retirement planning savings needs. The odds are that the more you make today, the more savings you'll need in retirement—thanks to the lifestyle creep prevalent in today's society. If you're different than most, congratulations—you can probably have fewer savings. But it won't matter because you're already saving more.

How Much Will You Collect From Social Security/Defined Pension Benefits During Retirement?

These monthly payments can subtract substantially from the amount you may have to save. Getting a good estimate is invaluable as you plan your retirement and determine your savings need.

When Will You Retire?

The younger you are when you retire, the longer you can expect to live during retirement. This lengthy retirement means you'll need more saved. If you wait longer until retirement, not only will you be retired for a shorter amount of time, but you will also work more years, meaning you can save more.

How Many Years Do You Plan to Spend in Retirement?

The number of retirement years is a kinder, gentler way of asking the tough question—how long do you plan on living? Based on your health and longevity expectations, you could spend 30 years or more in retirement. Figuring out how many years you will spend in retirement helps you figure out how much of your savings you will need to withdraw each year.

How Will You Invest? 

If you invest aggressively, you can reasonably expect a higher rate of return on your investments, meaning you'll have to save less compared to another individual who insists on keeping all investments in the bank's savings account.

How Much Have You Saved Already and How Old Are You Now?

The younger you are and the more you have saved, the less you'll need to save in the future to achieve the same retirement standard of living as someone older or with less money saved up until this point. The early bird gets more than the worm.

Determining Your Number

The most effective retirement plans focus on more than a retirement start date. They establish a target retirement savings amount needed to meet your desired income goals. Figuring out your estimated savings needed can be somewhat of a challenge.

For early-career retirement savers, best practice financial planning guidelines suggest saving somewhere between 10% to 15% of your income. But this assumes you begin saving relatively early in your career and is just a general guideline. If you got off to a slow start with your retirement savings, you might need to set aside 20% or more of your income to maintain your same comfortable lifestyle.

The best way to find out how much you will need to save for retirement is to create a budget plan for retirement and to run a basic retirement calculation to see if you are on the right track.

As you can see, there isn't a one-size-fits-all answer to the "How much should I save?" question of retirement. However, there is a rule of thumb. After you've determined what you think you'll need to live on during retirement, multiply it by 25.

For example, if you think you'll need $40,000 a year, one rule of thumb says that you'll need 25 times that amount or $1,000,000 to retire comfortably. On the other hand, if you'd receive $15,000 in Social Security benefits each year and a $5,000 annual pension, you'd only need half of the $40,000 each year from your savings. Since you'll only plan on pulling out about $20,000 each year, you'd need about $500,000 saved by your retirement date.

Still, a rule of thumb is not the rule of law. More importantly, everyone's retirement goals are personal, and no one gets into trouble because they saved too much too soon.

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