The Realistic Rationale: How Much Money Do You Actually Need to Retire?

How to Map Out Your Retirement Savings

Retirement looks different for everyone. But whether you plan to spend your golden years jet setting around the world, playing on the beach with your grandchildren or tending to your garden, one thing is true: It’s going to cost you.

Just how much it will cost you isn’t quite as clear. A study by Northwestern Mutual found that Americans now predict they’ll need $1.46 million to cover retirement, while a separate study by Charles Schwab reported that workers think the number is closer to $1.8 million.

In reality, the dollar amount that you’ll need in retirement will come down to your specific lifestyle, how long your retirement will be, how much you’ve saved over the years and what other funds are available to you. Doing the math while you’re still working will mean less of a headache down the road.

1. How Much Will You Spend in Retirement?

The financial planning industry has come up with a general rule of thumb for how much you’re likely to spend in retirement: 80% of your pre-retirement income. However, this may not accurately reflect your individual circumstances.

Mark Parthemer, chief wealth strategist at wealth management firm Glenmede, suggests looking at your current lifestyle and how much it costs, and then asking yourself what is going to change in retirement. He emphasizes the importance of tracking your spending to get a better idea of how much you’ll need in retirement.

Additionally, don’t forget about inflation, which can impact the cost of living in retirement.

2. How Long Will Your Retirement Be?

This question may be even more tricky than calculating how much you’ll spend in retirement, since no one knows how long they’ll live. The median retirement age is 62, and it’s important to factor in a longer retirement than you expect, especially if you have a family history of longevity.

You should also try to build a more individualized life expectancy estimate by considering factors like your family health history, gender, and behaviors around smoking, diet, and exercise.

3. What Will Your Sources of Income Be?

In retirement, you won’t just have your Social Security benefits, which are based on your lifetime earnings and affected by when you start receiving them.

Other sources of guaranteed income you may have in retirement include pensions, annuities, and life insurance.

4. How Much Will You Have in Retirement Savings?

Once you’ve determined how much you’ll need to live on in retirement and for how long, you can calculate the gap that needs to be covered with savings.

A general rule of thumb is to aim for a 4% withdrawal rate from your retirement portfolio, which should allow you to maintain your standard of living without eroding your principal investment.

It’s especially important to adjust your portfolio to make sure it aligns with your retirement goals and time horizons as you near retirement. This may involve trading some of your stock portfolio out for less risky assets like bonds.