There's a reason that retirement is considered the "golden years." After decades of working, it's a time for people to enjoy the fruits of their labor.
Retirement looks different for different people. Some want to spend time traveling the globe, some want to pick up a new hobby they didn't have the time to embrace before, and some want to do as little as possible. Regardless of your ideal retirement, the one common theme is that being financially stress-free during that time can greatly enhance the experience.
Part of being financially stress-free is knowing how much money you may need in retirement. Although there's no cookie-cutter answer, there are good baselines and guidelines that can help.
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Calculating how much you'll need using the 80% rule
A good starting point for figuring out how much you'll need in retirement is the 80% rule, which states that you should aim to have 80% of your last working year's income annually in retirement. Using that rule, here are examples of how much someone would aim for annually in retirement:
| Last Working Year's Income | Annual Income Goal in Retirement |
|---|---|
| $60,000 | $48,000 |
| $80,000 | $64,000 |
| $120,000 | $96,000 |
| $150,000 | $120,000 |
| $200,000 | $160,000 |
Calculations by author.
It's important to note that the 80% rule is simply a baseline, and the percentage should be adjusted according to one's plans for retirement. For example, if you plan to spend time traveling, you might want to increase the percentage to account for added expenses. If you plan to spend the time more leisurely, you can likely lower the percentage.
Adding on to the 80% rule using the 4% rule
While the 80% rule focuses on how much someone should aim for annually, the 4% rule is used to estimate how much someone would need to save in total for retirement. According to the 4% rule, someone can withdraw 4% of their retirement savings in the first year of retirement and then adjust that amount annually to account for inflation and not worry about running out of money for at least 30 years.
One of the easier ways to put the 4% rule into action is by multiplying your ideal annual income amount by 25. Using that and furthering our example, here's how much someone would aim to have saved in total:
| Last Working Year's Income | Annual Income Goal in Retirement | Ideal Total Amount Saved |
|---|---|---|
| $60,000 | $48,000 | $1.2 million |
| $80,000 | $64,000 | $1.6 million |
| $120,000 | $96,000 | $2.4 million |
| $150,000 | $120,000 | $3 million |
| $200,000 | $160,000 | $4 million |
Calculations by author.
Like the 80% rule, the 4% rule is more of a baseline than a concrete rule that should be blindly followed. To begin, it assumes someone has a portfolio of 60% stocks and 40% bonds and maintains the same spending pattern throughout retirement. For many people, this isn't the case, as people tend to spend more at the front end of retirement than the back end.
Some experts also recommend lowering the initial 4% withdrawal to account for periods of high inflation. For example, accounting for the hyperinflation that happened in 2022 could put someone in a position to run through their funds quicker than intended. Recessions and similar periods could warrant downsizing your lifestyle for the time.
Use common guidelines, but always account for your personal situation
Financial needs in retirement, much like any other aspect of personal finances, are very situation-specific. It would be nice to be able to give a one-number-suits-all answer regarding how much you will need in retirement, but that's just not the case. And going about your retirement savings as if it's the case can often be counterproductive.
The one thing you always want to keep in mind is that there's no such thing as being financially overprepared for retirement, but there's absolutely such a thing as being financially underprepared -- and you never want to be the latter.
By utilizing all available resources (retirement accounts, investments, Social Security, etc.), you can ensure you're approaching retirement with the capability to enjoy it however you envision for yourself. By that point, you would've earned it.
