How Much Do I Really Need To Retire? Let's Do The Math

If you’re reading this, then you are in one of two camps. Either you are nearing retirement and are wondering if you have enough to retire, Or you are not yet retiring but are planning ahead. In either scenario, figuring out how much you need to retire is an incredibly important step you need to take.

Let me start off by saying well done for taking initiative and doing the research. That right there is a great step to reaching your retirement goals!

So how much do you really need to retire? Figuring out how much you need to retire can help you plan ahead and save accordingly. You want to plan ahead so you know exactly what to work towards. You don’t want to blindly save without knowing what your target is.

Let’s take a second to figure out just how much you really need to retire.

How much do I need to retire?

According to financial experts, you should always save enough to replace 70% of your annual pre-tax income. If you are currently earning $80,000 a year (roughly the current median US household income), your retirement should have enough to replace 70% of that. That comes out to about $56,000 a year. To keep the math simple in the examples below, let’s use a $65,000 earner replacing 70%, which comes out to about $45,500 a year — but swap in your own number as you read.

This number is assuming that your monthly expenses in retirement will be lower than while you were younger. It’s also assuming that you have all your personal debt paid off, mortgage payment paid off, as well as student loans paid off.

However, if you anticipate that your retirement spending will remain the same or might actually become higher, then this amount would definitely not be enough. If you plan on doing expensive trips around the world or being very philanthropic, then you would need a lot more in your retirement savings. Remember to figure out the math.

So should I save or invest for retirement?

According to research performed by Schwab, 64% of people see themselves as savers instead of investors. This means that only 36% of people in the survey contribute their money into retirement investment accounts such as a 401k, IRA, or HSA.

The problem with just saving, as opposed to investing, is that your money loses value year-over-year. This is called inflation. You don’t want to have your money sitting in a savings account for retirement purposes. Once you retire, that money will be worth less than when you put it in there.

It’s important then to always aim to invest, rather than just purely saving. Saving works for short-term goals like saving up to buy a new TV or a new car. It doesn’t work as well when it comes to saving for retirement because it’s much further out in the future. Inflation will eat into your savings, rapidly!

The 4% retirement rule

Now that we figured out how much income you would probably need to replace once you retire, it’s time we figure out what exact dollar amount you need to have saved in your retirement accounts.

To generate $45,500 a year in income, you would need a retirement account with $1,137,500 in it. This assumes that your retirement account earns a return of about 5% or more per year. This also assumes that you have no other forms of income like investment properties or Social Security.

To calculate this, you divide your annual retirement income ($45,500) by 0.04. That comes out to $1,137,500. Once you know your big target number, our savings goal calculator can help you reverse-engineer how much you need to set aside each month to actually get there.

Using this number, your retirement account will never run out. Since you’re only spending 4% a year, but it’s earning an average of 5% a year, you will end up spending less than it is growing.

This strategy will only work if you stick to it 100%. Any year that you spend above 4% will have serious consequences on how much would be left in your account. So make sure to never spend more than the allocated 4% per year without fail!

What about additional sources of income?

The 4% rule I mentioned above does not consider any other sources of income other than your retirement account. Chances are when you retire, you might also have additional streams of income that can support you during retirement.

The most popular additional source of income is your Social Security. As of recently, the average Social Security retirement payment has been somewhere around $1,500–$2,000 per month, or roughly $18,000–$24,000 a year. Again, this is completely separate from your retirement account, so this can greatly help sustain you. (Check your own estimate on ssa.gov, since your actual benefit depends on your earnings history and the age you claim.)

Another great source of additional income is owning rental properties. If you have rental properties that net you some income, then it’s money that can also help you sustain yourself in retirement.

By having these additional sources of income, it can significantly reduce how much you really need to have saved in your retirement account to be able to retire or even improve your standard of living.

Is retirement income taxable?

Depending on your source of income, some of it might actually be taxed. The good news is, because you are older, you are likely earning less than you were when you were younger. This puts you in a lower tax bracket, and lowers your tax burden.

If the primary source of your retirement income is a 401k, your distributions are taxed at whatever tax bracket you are currently in as a retiree.

If you have money saved in a post-tax retirement account such as a Roth IRA, then those distributions are not taxed at all. This is because you were taxed at the time you contributed to it, and now you can spend that retirement money tax-free.

Lastly, when it comes to Social Security, it depends on your retirement income. If your retirement income is less than $25,000 as an individual or $32,000 married, you won’t have to pay any social security tax. If your income is higher than that, your social security might be taxed up to 50% or even as high as 85%. Make sure to discuss this with a tax specialist to know exactly what your Social Security taxes might be.

The end goal is to make sure that you pay as little tax as possible so you can retire with as much income as possible. The more tax you pay earlier in your career, the less you have to pay in retirement. The opposite is true. Accounts like a 401k help you to not pay taxes early on in your career as you contribute to it, but you pay taxes in retirement when you start taking distributions.

So it’s up to you to figure out if you are going to be in a higher or lower tax bracket once you retire. That’ll help you figure out if it’s better to pay your taxes now or pay taxes later.

How do I track my retirement progress?

If you want to know how well you are doing in reaching your retirement goals, the easiest place to start is our free money dashboard. The net worth tab pulls all your accounts into one live view, so instead of logging into a dozen retirement and savings accounts and adding numbers up by hand, you can see exactly where you stand at a glance — and watch that number climb over time.

If you want a dedicated planning tool on top of that, Empower (formerly Personal Capital) is a solid free option. It lets you connect your retirement accounts (401k, IRA, etc.), and its retirement planning tool lets you enter your goals and forecast whether you’re on track, with suggested adjustments to help you get there.

Final thoughts

Now that you understand how to calculate how much you need to retire, you now have to take a second and take a look at your own finances.

The good news is it’s never too late. There are ways you can play catch-up by simply contributing the absolute maximum that your retirement accounts can allow. You can also work on eliminating all your debts so you don’t have that burden in retirement.

The goal here is to save as much as you can so you can retire comfortably without having Financial burdens. Retirement is supposed to be a time of relaxation instead of financial stress.

Definitely take the time to pay attention to your finances and focus on saving up for your retirement. The sooner you start the better!