A retirement nest egg doesn't just happen -- it's the kind of thing that takes decades of hard work, saving, and planning. 

To help decode the retirement equation, we made put together this video breaking down:

  • What percentage of your expenses you should expect Social Security to cover 
  • How many years of your annual income you should have saved for retirement
  • Some ways to help you get to that number

Catch the video below and head over to our YouTube channel to get more explainer content on topics like IPOs, dividends, and more!

 

Narration: Hi, I'm Kirsten from The Motley Fool. In this FAQ, we're going to answer a question everyone wants to know: how much money do I need to retire?

First of all, it's great that you're asking yourself this question. Having enough for retirement doesn't just happen – it's a coordinated effort. And that effort is easier if you have a goal in mind – so how much money do you need to retire?

The real answer is that it's different for everyone. But let's start with a general rule and break down how that can vary per person.

Most studies agree that, in order to retire, you will need about 12 times your annual salary at retirement age. If that sounds like a lot, that's because it is. But that's why it's so important to save – or as I like to think of it: paying your future self. But if that number sounds intimidating, let's look at all the ways you can build up to that.

First of all, that total amount you need for retirement does include Social Security. Most people have been paying into Social Security a little bit with each paycheck, every year that they work. If that's you, you can expect to receive a monthly benefit check in retirement. To maximize your monthly check, there's a couple things you can do:

  1. Make as high a salary as you possibly can – OK, you were probably already doing that one
  2. Work a full 35 years, because that's how many years the Social Security Administration is basing your benefits on. AND as a bonus, if you're making a higher salary toward the end of your career, which is quite common, you can work more than 35 years to increase your monthly Social Security benefit check.
  3. Delay retirement. We here at The Motley Fool like to say that 70 is the new 65 when it comes to retirement age.

For more details on calculating your expected monthly Social Security benefit and how to optimize that check, check out the link in the description below.

But even then, Social Security will not cover all that you need in retirement. In its benefit overview document, the Social Security Administration makes it clear:

 "Social Security was never meant to be the only source of income for people when they retire."

It is designed to replace a percentage of your income, depending on how much you earn. For very low earners, Social Security can provide up to 75% of your retirement needs; for medium earners, about 40%; for high earners, about 27%. 

The rest of your retirement funds will come from whatever you have saved – so it's important to make sure you are saving. The best place to start, if it's available to you, is an Employee Savings Plan. Most commonly this is a 401(k).

If your employer offers one, make sure you are using it. This is a tax-advantaged account for saving – meaning you don't have to pay any taxes now on the money you contribute to this account. Plus, according to the Bureau of Labor Statistics, roughly half of companies offer a 401(k) match, up to an average of 3%. That means, as an example, that if you contributed 3% of your paycheck to this account, your employer will match it with another 3%. That's free money! So make sure to check what's available to you, and try to save at least enough to get the match.

If you don't have a workplace plan, you can still open an individual retirement account, an IRA. There is a maximum amount you can contribute to this type of account, so be sure to check that each year.

The beauty of these retirement accounts is that your money grows in two ways. First, it will grow as you steadily contribute to it each month. But second, all the money in your account will be invested and will grow all on its own through the magic of compounding interest.

For a quick example, investing $3,000 per year for 40 years at an annual return of 8% yields over $750,000 come retirement time.

That may be enough for people with a relatively low cost of living, but it might not be close to enough for folks that head into retirement with a lot of expenses.

That's why it's also important to think about the money you have going out when you're making your retirement plans.

Maybe you had children who have since moved out of your home – consider downsizing. If you live in an expensive area, consider moving somewhere with a lower cost-of-living. Maybe even move to a state with no state income tax – that means fewer taxes on Social Security benefits, 401(k) withdrawals, and other retirement income.

There's a reason Florida is such a popular retirement destination.

There isn't a one-size fits all answer to how much you money you need to comfortably retire, but understanding the 12x income rule, realizing that social security is just a part of the retirement picture, and adjusting expenses will put you on the path to finding the right figure for yourself.

Thanks for watching everyone – if you have any thoughts on the topic, or have any future topics you'd like to request, drop a comment below.

And if you're looking for some help with investing, we've got a free starter kit over at Fool.com/Start – it covers everything from money saving tips to buying your first stock and it comes with a 5 stock sampler from our premium analysts!

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