How much do I need for retirement?

Learn how to estimate your needs — and increase the chances of meeting your goal

If you look up “How much savings will I need to retire,” you’re likely to find dozens of answers from a variety of sources. But every person’s vision of retirement is different. Instead of reading about how much others think you’ll need, why not take a few minutes to learn how to arrive at your own ballpark estimate — based on your individual circumstances, needs, goals and desired retirement lifestyle. Once you have a number in mind, you’ll have a more solid foundation on which to build a retirement savings plan that works for you. This article can help by telling you about:

• Useful rules of thumb for retirement planning.

• Ways to estimate how much savings and income you’ll need.

• How to increase the chances of meeting your retirement goals.

• Considerations to help keep you on track.

A good place to start: Retirement planning rules of thumb

Arriving at your retirement savings estimate will take a few steps, but don't worry. If you have access to a pencil, a calculator and some free time, you should be okay. But even before you start making calculations based on your financial needs, it's a good idea to familiarize yourself with some of the more popular retirement planning guidelines.

• The 70-80% rule
  A commonly suggested benchmark is to aim for a retirement income that replaces around 70-80% of your pre-retirement annual income. People often need less income in retirement because their houses are often paid off, and many other expenses are actually work-related. Also, there's no longer a need to save for retirement. While this guideline doesn't work for everyone — such as people who plan to do a lot of luxury travel in retirement — it's a good place to start.

• The 12X rule
  This rule says that you should save 12X your annual income at retirement. So if you anticipate a pre-retirement income of $100,000 a year at age 66-67, you should save $1.2 million for retirement. This guideline assumes that your savings will earn a rate of return on par with historical averages. With a conservative withdrawal rate, typically around 4%, you might be able to maintain your lifestyle in retirement while slowly depleting your principal.

• The 25 times rule
  According to the 25 times guideline, you should try to accumulate savings equal to 25 times your planned annual expenses in retirement. Based on historically average rates of return, this might allow you to withdraw 4% of your nest egg each year, and you might be able to do so for 30 years (or possibly more).

• The 4% rule
  According to this guideline, a person can withdraw 4% of their retirement savings in the first year of retirement and adjust subsequent withdrawals for inflation in the following years (in other words, if inflation is 3%, the next year's withdrawals are 3% higher). This withdrawal rate suggests that a person's savings could last for approximately 30 years without running out of money. So, for example, if a person's retirement fund is $1 million, they can withdraw the inflation-adjusted equivalent of $40,000 per year. However, there are risks including the possibility of unprecedented periods of inflation or market downturns that this model doesn’t take into account.¹

Applying these guidelines individually or in combination with each other is a great way to start the retirement planning process and can help you get an initial ballpark estimate. An online retirement calculator may also be a helpful tool. Of course, everyone's situation, circumstances, goals and needs will differ, so it's important to remember that these are not really "rules," but general guidelines. You should also note that they are based on certain assumptions, such as having retirement funds invested in a diversified portfolio with moderate risk and historically average rates of return.

Key factors in estimating your retirement savings needs

The retirement guidelines above can provide a good initial estimate of what you'll need as a nest egg. To calculate a more accurate number, you'll want to consider several key factors, including your expected retirement age, your desired retirement lifestyle, your estimated expenses, and what other sources of cash flow you'll have, such as your Social Security benefit. Once you have these answers, you'll be in a better position to home in on a more accurate estimate.

When will your retirement start, and how long will it last?

First, think about when you’d like to retire. Will you aim for the 2023 median and retire at age 62, or do you plan to continue working to 65?² Or later? Maybe you’d like to retire at age 55. Clearly, nobody knows what the future may hold, but take a best guess based on your current circumstances and goals.

You also should consider how long your retirement might last. It can be a tricky calculation, but it’s important to have some idea of how many years you’ll have to rely on your savings in retirement. Think about the average longevity in your family, your current health status and the expected lifespan of people in the same socioeconomic group as you. As a starting point for your calculations, consider the fact that at the median retirement age of 62, a male can expect to live for another 22.1 years, and a female has 22.9 years of life expectancy, based on actuarial data from the Social Security Administration.³

What is your desired lifestyle after you stop working?

Next, think about what type of lifestyle you’d like to have in retirement. Do you plan to stay in your current home and maintain your current lifestyle? Do you hope to move to a more upscale resort location where housing costs may be higher? Are you looking forward to extensive travel or other costly endeavors? Or, do you intend to downsize and cut back to minimize your financial needs? These are important questions. Your lifestyle in retirement will, in large part, determine your expenses in retirement. And your expenses in retirement will determine how much savings you will need.

How much will you spend during retirement?

Estimating your expenses during retirement will take more than a few minutes, but it's central to the planning process. So be sure to take time to go through the following steps. Keep in mind that this is not an exact science and that your goal is to come up with a solid ballpark estimate that you can "tweak" as your life circumstances change and you get closer to retirement age.

• Start by recording your current monthly expenses. This will serve as a baseline for estimating your expenses in retirement.

• Think about the impact of inflation. Generally, it's advisable to assume an average inflation rate of about 3% per year.

• Consider any anticipated lifestyle changes — such as downsizing or relocating — and how they might affect your expenses.

• Add in healthcare costs, which tend to increase with age. How much will you spend on insurance, out-of-pocket costs and more?

• Evaluate your outstanding debts — including mortgage payments — and figure out whether they’ll be paid off by the time you retire.

• Think about any plans you have for retirement — such as travel and new hobbies — and include these discretionary expenses in your calculations.

• Consider any other potential expenses, from helping an adult child and their family, to buying or leasing a new car.

Finally, assume that there will always be unanticipated expenses, and build in some sort of cushion to your desired annual retirement income in order to reflect this reality.

What additional retirement income will you have?

Think about what sources of monthly income you’ll have in retirement other than interest, dividends and earnings generated by your savings and investments. These might include Social Security benefits, pension, rental income, and part-time work.

How much income will you have to generate from your nest egg?

The next step is to determine approximately how much retirement income you'll have to generate via your savings and investments. This is a fairly simple calculation. Simply subtract your non-savings income from your estimated expenses. For instance, if you estimate your living expenses at $90,000 per year and expect to earn a total of $45,000 from Social Security income and part-time work, you'll have to generate $45,000 (after taxes) from your retirement nest egg to make up the difference. Of course, any money you "draw down" from your savings will reduce the amount of income you'll have to generate, but — as a general guideline — it's preferable not to draw down savings unless absolutely necessary.

How can you meet your retirement savings goals?

By following the steps above, you should be able to arrive at a ballpark savings goal — approximately how much money you’ll have to save to ensure the type of retirement you want. The next step is to develop a retirement savings plan that can help you reach your goal. Here are some basic tips:

• Start by setting clear retirement goals. Determine how much money you would like to have at retirement and the age at which you plan to retire. This will help you to estimate the savings required and set a timeline for achieving your goals.

• Set an annual savings goal. While there is no iron-clad rule, many financial professionals recommend that you try to save 15% of your gross annual salary every year — starting at or around age 25.

• Estimate how much you can afford to save. Calculate how much money you can afford to apply to retirement savings each month; in other words, how much is left over after accounting for all living expenses, debt repayment and other ongoing expenditures. If you're unhappy with the number, consider where you might economize to free up additional funds.

• Take full advantage of employer-sponsored retirement plans. If your employer offers a 401(k) or other retirement plan, try to contribute the maximum allowable amount each year, if at all possible. And remember: Matching contributions offered by your employer add “free money” to your savings.

• Take full advantage of individual retirement accounts

• If you’re self-employed or have the funds to supplement an employer-sponsored retirement plan, open an individual retirement account. IRAs offer tax advantages and a broader range of investment options. Traditional IRAs provide tax-deferred growth, while Roth IRAs offer the potential for income tax-free withdrawals in retirement.

• Diversify your investments. Try allocating your retirement contributions across a diversified portfolio of investment options offered within the plan. Use a combination of stocks, bonds, mutual funds and FDIC-insured vehicles to balance risk and potential returns. Consider your risk tolerance and investment goals when selecting the appropriate investment mix — and consult with a financial professional if you need help.

• Regularly review and adjust your plan. Review your retirement accounts periodically to help ensure alignment with your evolving financial situation and goals. Adjust your contributions and investment allocations as necessary. And, should you need help, think about consulting a financial professional or tax advisor.

Are you on track to meet your retirement savings goal?

Retirement readiness is another topic for which there are no iron-clad rules, but rather, a number of general guidelines. Investopedia has written about the following savings timeline:

• Age 30: one time your annual salary at the time.

• Age 40: three times your annual salary at the time.

• Age 50: six times your annual salary at the time.

• Age 60: eight times your annual salary at the time.

• Age 67 (retirement age): ten times your annual salary at the time.⁴

Again, this is just one of many recommendations for a retirement savings timeline. There are many others, including those corresponding to the 12X rule, which recommends saving 12X annual income by retirement age.

Guardian can help you save for retirement 

This information can provide a good start in helping you estimate your retirement savings needs and develop a retirement savings plan. However, as you get deeper into the process, you may have financial issues and retirement planning questions that you’d like to discuss with a financial professional.

If you don’t currently know such a professional, Guardian can help. A Guardian Financial Professional will listen to your needs, help define your goals, and work with you to better understand the retirement planning process and make the right decisions. Here’s how to find someone near you:

Need more information on planning for retirement?

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Frequently asked questions about saving for retirement