How Do I Determine How Much I’ll Need to Retire?

Key takeaways:

• Retirement is a big step, and you should do some thinking about what it will involve before you start making specific plans for investing or spending.
• This post outlines the big things to think about, from how long you’ll live to how much you may spend.
  

If you’ve been thinking nervously about the prospect of saving for retirement, you’re not alone. What’s more, the options you have for calculating, investing and spending may seem overwhelming. But before you start throwing numbers into an online calculator or buying financial products or services aimed at retirees, take some time to consider several things.

How much is needed will vary – a lot – from person to person, because your retirement plans will vary. Do you expect to retire fully and never work again, or is there a possibility you’ll want to take a part-time job or do some consulting or freelancing? Do you expect to do lots of traveling and pursue hobbies that you didn’t have time to do while you were working? That may be a more costly retirement than one spent gardening and reading, for example. 

You should also make sure you really understand all your sources of future income. You can get an updated estimate of your Social Security income at this site, for starters. 

Also nail down an accounting of any retirement plans you’ve opened through your employers or on your own. Those may include pensions, Individual Retirement Accounts (IRAs), and what’s often called “defined contribution plans,” such as 401(k) or 403(b) accounts. You’ll want to know how much money you have in each, as well as any rules and penalties for taking that money out of the account and spending it. 

Total up all the things you spend money on, from housing and utilities to necessities like groceries and fun things like gifts and entertainment. You can multiply that by the number of years you expect to live after retiring to get a very, very rough estimate of your expected expenses. 

You can consult the Social Security Administration’s website for the most up-to-date information on how long you should expect to live at any age. For example, a 60-year-old male can now expect to live another 20.47 years; a female of that age can expect to live another 23.67 years. Bear in mind this can differ dramatically by individual.

Once you figure out expenses and expected income, you’ll have a very approximate budget. Many experts advise living according to this budget for at least a year before you retire to see if you’ve estimated accurately, or if your budget needs adjustment. There’s an old retirement “rule of thumb” that when you retire you should have saved up about 10 times your current salary. If you make $75,000 now, you should have $750,000 saved, in other words. While that’s a very rough approach that won’t apply to everyone, you may want to see how it squares with the budget you develop.

Importantly, if you are carrying any debt, you shouldn’t approach retirement without a concrete plan to eliminate it. This could include paying off your home if you’re still carrying a mortgage, paying off any credit card debt and settling any student loan debt. If that means delaying the age at which you retire, that might be wise. 

You should also make sure you have a general understanding of the health care options available to you when you retire. Yes, Medicare is available to people over 65, but it doesn’t pay for everything. Supplementing it with some private coverage is important. If you’re not planning to retire for a while, some of the details may change between now and then, but it may not hurt to start educating yourself on the options.
 

With all that legwork finished, you might want to use one of the many online retirement calculators available to get a realistic idea of how much savings you’ll need for your anticipated budget. If there’s only enough money to live out your plan for five years, and you think you could realistically live 20-30 more years, you’ll need to adjust. AARP has one such calculator. The Consumer Financial Protection Bureau, part of the federal government, has some tools available online as well.

Retirement is a big transition. Approaching it carefully and thoughtfully over time is the best way to tackle it.