The hardest question to answer when you're thinking about your retirement is how much money you'll need. Given how hard it is to predict how much income you'll get, how your investments will perform, and what your expenses will be, it can seem almost impossible to guess how big a nest egg you'll need.
Fortunately, there are some general guidelines you can use to figure out how much money you're likely to need in retirement. Below, you'll find several viewpoints on the question and things you can do to answer it.
Andres Cardenal: There is no way to tell precisely how much money you will need for a comfortable retirement, as this will depend on all kinds of assumptions regarding spending habits, inflation, and investment returns, among other variables. However, the 4% rule is a popular rule of thumb which can be quite useful for retirement planning purposes.
The 4% rule was developed by financial advisor William P. Bengen, and other statistical studies have confirmed that it's a conservative approach to the question of how much money you can withdraw from your portfolio in retirement. According to these calculations, if you own a well-diversified portfolio of bonds and stocks, you can safely withdraw 4% of your capital in the first year, adjusting the amount by inflation in the following years. Under this strategy, chances are that your money should last for 30 years or more.
We can then reverse the math to calculate how much money you need to save for retirement. Assuming you want to withdraw $50,000 annually from your portfolio while keeping up with inflation over 30 years, this means you would need to save $1.25 million, which comes from calculating 50,000 divided by 4%.
Selena Maranjian: How much money will you need in retirement? There's a good chance you'll need more than you think. For one thing, if you're thinking that the fixed income you expect will be sufficient, you're forgetting the power of inflation. Social Security payments do get adjusted for inflation, but any fixed-income streams will likely lose purchasing power from year to year. If inflation averages 3% annually over 20 years, it will turn an annual income of $50,000 into one with the buying power of roughly $27,000 in 2036.
If you're counting on Social Security to fund much of your retirement, you may end up surprised to learn that the average Social Security retirement benefit was recently $1,338 per month, or about $16,000 per year. If you've been a higher-than-average earner, you can expect more than that, but the overall maximum monthly Social Security benefit for those retiring at their full retirement age in 2015 was $2,663 -- or about $32,000.
Another reason you might need more than you expect in retirement is healthcare, which has seen costs increase at a rate much faster than inflation. According to Fidelity Investments, a 65-year-old couple retiring today will spend, on average, a total of $245,000 out of pocket on healthcare.
Those are just a few concerns. Living a long life can also spell financial trouble, if you run out of money, and you might end up spending more than you expected, too -- on expensive hobbies, travel, or perhaps supporting family members in need. For best results when saving for retirement, hope for the best and plan for the worst.
Jason Hall: There are a lot of things that will influence how much money you'll need in retirement, including lifestyle, debt, and how much you can expect from programs like Social Security and pension benefits. But two of the most important money-impacting things are debt and housing.
According to the Harvard University Joint Center for Housing Studies, homeownership rates for older Americans has fallen over the past decade. At the same time, the percentage of homeowners over 50 with mortgage debt has increased. In other words, there will be a smaller percentage of retirees owning a home in the future, while more of those who do own a home will still be paying a mortgage.
And while there's nothing written in stone that requires you to own a home in retirement, homeowner retirees tend to have more disposable income, and spend more money on things like food and healthcare than those who rent, or are burdened by housing costs like debt. It's pretty simple math: Homeowners with no mortgage have lower housing costs, and housing costs can be one of the most expensive things a retiree pays for.
In other words, if you enter retirement with a home that's paid for, you'll almost certainly need less money than someone who still has years of mortgage payments left, or doesn't own a home at all. This can be especially true in later years, when home equity can be tapped for income.
Steve Symington: To be honest, I think investors spend too much time trying to answer this question. Of course, there are solid guidelines to get you in the ballpark. Take the 4% rule, for instance, which Andres discusses above. If you have a $2 million nest egg, for example, the 4% rule says you can safely withdraw up to $80,000 each year with a reasonable degree of certainty you won't outlive your savings.
But that also doesn't take into account personal circumstances. You might have Social Security or a pension that reduces the amount you need elsewhere to reach your goal. Or you might incur significantly higher medical bills in retirement that increase the amount of money you'll need.
As a result -- an as ungratifying as it seems -- I might counter that the best answer to how much you'll need in retirement is "as much as possible."
Simply put, strive whenever possible to consistently exercise frugality and spend less than you earn. Then take the difference and sock it away. And do so as early in your life as possible in order let returns on your investments more effectively compound with time. Assuming you plan to retire after age 59-1/2, you should also strongly consider first maxing out annual contributions to tax-advantaged accounts like company-matched 401(k)s, traditional IRAs, and Roth IRAs.
In the end, if it helps to set goals using rules of thumb like the 4% rule, then so be it. But you'll be hard pressed to meet those goals if you can't first master the concept of spending less than you earn, and saving whatever's left over.
Dan Caplinger: There are plenty of rules to follow for deciding how much you need in order to retire comfortably. But the fact is that most people retire on far less than those rules would suggest is necessary, and although many retirees don't get to have the lavish vacations they might have dreamed about during their careers, they still manage to find ways to get by even without satisfying the 4% rule or other typical guidelines from financial planning experts.
The key to retirement planning is accurately assessing your resources. As an extreme example, many financial planners warn that medical expenses can skyrocket in retirement, with even basic needs requiring costly assisted living centers or higher-end facilities. Yet in some cases, retirees get by with the help of friends and family who charge nothing for their time. In addition, various programs both from the government and from private-sector sources offer financial resources to seniors that can stretch their dollars further. Taking advantage of discounts and other opportunities can leave you needing less in your nest egg.
Ideally, saving enough to cover all possible expenses is a good goal. Yet keep in mind that many people fall short yet still find ways to live a happy life in retirement.