How much money do you really need to retire?
You may be wondering what dollar amount will be enough money to comfortably retire. Unfortunately, there's not a one-size-fits-all number. To estimate how much money you personally need to retire, follow these basic steps:
- Estimate your total annual living expenses in retirement. You can use the rule of thumb that the typical retiree needs about 80% of his or her pre-retirement income to maintain the same standard of living after leaving the workforce for good.
- Subtract your expected Social Security benefits and any pension income you expect to receive from your estimated total annual living expenses in retirement to compute your estimated net annual living expenses. Your latest Social Security statement, which you can find on the Social Security website, has an estimate of the Social Security income you are likely to receive.
- Multiply your estimated net annual living expenses in retirement by 25 to determine the total amount of money you need to save for retirement. Multiplying your expenses in retirement by 25 to determine the total amount of retirement money you need is linked to another rule of thumb called the 4% rule. This rule advises you not to withdraw more than 4% of your retirement savings per year in order to fund your retirement for at least 30 years.
How to save and invest for retirement
Saving money is distinctly different from investing it. Most people save for retirement by investing money, often in the stock market. You are unlikely to meet your retirement planning goals if you simply allocate a portion of your salary to a savings account. You need to invest in assets that gain value.
To emphasize that the way to save for retirement is to learn how to invest, imagine that you contribute $5,000 per year to a savings account paying 1% interest annually. In 35 years, that account would be worth $208,000, with $175,000 being your own contributions. But if you invested that same $5,000 annually, assuming just a 7% average annual return, the account would hold close to $700,000.
Of course, the returns your portfolio achieves depend on what you invest in. We advocate for as the best way over the long term to build and retain wealth, and we also advocate for saving some money in cash.
