Retirement Savings Jar

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What's your retirement number? Recent data shows that the majority of Americans have no idea how much they need to save for retirement -- rather, most just guess an arbitrary round number, such as $1 million. While having a random savings goal is obviously better than none at all, finding a more accurate retirement number doesn't have to be complicated. Here are three easy steps to determine yours.

First, figure out how much income you'll need after retirement

Experts generally suggest you'll need about 80% of your pre-retirement income to maintain the same lifestyle in retirement.

Why 80%? This figure accounts for certain expenses you probably won't have to pay anymore. As an obvious example, you'll no longer have a need to set some of your paycheck aside to save for retirement. You also may not have some work-related expenses anymore, such as the cost of commuting and going out to lunch while at work.

Naturally, this rule of thumb isn't perfect. If you're more of a thrifty person and save more of your income than most people, you can probably maintain your lifestyle with less than 80% of your income. Conversely, if your current lifestyle consumes pretty much all of your income, your retirement income need may be closer to 100% of your current income.

So, while the 80% guideline is a good rule of thumb for most people, for the most accurate estimate, consider which expenses you'll no longer have in retirement as a percentage of your current salary. Then, multiply this percentage by your current income.

Next, consider your other sources of income

Now that you know your post-retirement income needs, the next step is to figure out where it's going to come from. For this, you'll need to account for all of your retirement income sources. For most people, this means Social Security, but it can also include pension income or any annuities already purchased.

Social Security benefits are calculated by applying a formula to your 35 highest-income years on an inflation-adjusted basis. This can be a lengthy calculation, but there's an easier way. If you create an account at and view your Social Security statement, you'll see an estimate of your future Social Security benefits based on your current income and work history, as well as your expected retirement age. There's a ton of other information on your statement -- here's a screenshot of mine, with numbers removed for privacy:

Ss Statement

Image source: Author's Social Security statement, obtained via Social Security Administration.

If you expect a pension from your current or former employer, you should be able to log on to the retirement plan's website and view an estimate of your retirement income from that source.

Subtract all of your non-savings income sources from the annual income needed that you determined in the first step. This is the amount you'll need to withdrawal from your retirement savings.

Finally, use the 4% rule (or 3%-5% rule)

There are a few things to consider when deciding how much you can safely withdraw from your retirement savings each year without having to worry about running out of money later on. Just to name a few big factors, you need to consider your investments' annual yield or total returns, your age at retirement, and how much money you get from other sources.

The most commonly used guideline is known as the "4% rule," which says that if you withdraw 4% of your savings during your first year of retirement, then give yourself cost-of-living adjustments in subsequent years, the chance of running out of money within 30 years is small.

Just like the retirement income step we discussed earlier, this can be modified to fit your personal situation. For example, if you plan to retire early, your money will need to last longer, so you may want to use a 3% rule to be safe. On the other hand, if you retire late, or have lots of money coming in from other sources, withdrawing up to 5% per year might be the best move for you.

As a final step in calculating your retirement number, divide the amount of income you'll need from savings by your withdrawal rate, expressed as a decimal. For example, a 4% withdrawal rate would be 0.04 when converted to a decimal.

An example

Let's say you and your spouse have combined income of $100,000 per year, and that you'll need about 80% of your income after retirement, or $80,000.

Neither of you has a pension, and a look at your Social Security statement tells you to expect a combined $3,000 per month from Social Security, or $36,000 per year, if you retire at your full retirement age, which you plan to do. This leaves $44,000 that will need to come from savings.

Based on the 4% rule, dividing $44,000 by 0.04 gives a savings target of $1.1 million. This includes money you have set aside in your 401(k)s or other employer-sponsored plans, IRAs, and any other investment or savings accounts.

A recap of the steps

Here's the "cheat sheet" version of these steps to help you calculate your own retirement number:

Retirement Number Steps

A final thought

There's no way to accurately project exactly how much you'll need to save for retirement, but this method can give you a pretty good estimate. So, as a final thought, it's a smart idea to err on the side of caution and aim to exceed your retirement number before leaving work for good. After all, the last thing you want is to be 85 years old and running out of money.

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