That question – and figuring out the answer – is daunting, especially since you can’t see the future. There’s no “one-size-fits-all” magic retirement number. You’ll need more money after you retire if you have children or grandchildren to take care of, for example, or are still paying a mortgage or school loans; everyone’s circumstances are different.
Popular opinion says a comfortable retirement is only possible if you have between $1 million and $1.5 million. Some people say to aim for a retirement savings of ten to twelve times your current income. Some retirement experts say that the average retiree will need to replace 70%-80% of their income in retirement.
Developing a satisfactory answer is a bit challenging, but here are some things to consider:
Look at it backward
That is, take what you’re spending now and use it to determine how much money you’ll need to save to sustain that level of spending after retirement.
Don’t forget, however, that some expenses will lessen – think work-related costs like commuting – while some expenses will increase – think travel and new hobbies – so imagine your ideal retirement and factor in the activities you plan to pursue.
Don’t overlook the obvious expenses
While you’re dreaming about traveling and new hobbies, don’t forget the cost of living.
According to data from the Bureau of Labor Statistics (BLS), here’s a breakdown of the biggest average annual expenses among older individuals (that is, ages 65+).
- Housing: $15,838
- Transportation: $8,338
- Food: $6,303
- Health care: $5,956
- Entertainment: $2,988
- Other (Includes alcohol, tobacco, personal care products/services, reading, education, life and personal insurance, and miscellaneous expenses): $5,257
Keep in mind that these numbers are only averages. Some costs declined with age while others – most prominently, health care – increased with age.
Consider the 4% rule
Once you’re retired with money saved up, keep the 4% rule in mind: you can safely withdraw 4% of your retirement savings each year without running out of money.
Use an online retirement calculator
An online retirement calculator can also help you determine how much you’ll need for retirement. A good calculator considers items such as projected inflation, life expectancy, and market returns.
Here are several options:
It’s not wise to rely on an online calculator, of course, but you can use it as a tool to help you think more about retirement and if you’re headed in the right direction.
The bottom line
Unfortunately, it’s unlikely that you’ll come up with a magic retirement number – there are too many variables. It’s impossible to know how long you’ll live, for example, or if you’ll get sick. You can’t predict an economic depression nor calculate inflation. The best thing you can do is start saving now and save as aggressively as you can for as long as you can.
The next best thing you can do is consult a financial advisor. Although our above tips are useful considerations, nothing replaces the advice of a professional. Contact us for more information.