How Much Money Do I Need to Retire?

senior couple

The Bureau of Labor and Statistics estimates the average household with at least one member over 65 spends $50,000 a year. How much you need to save for retirement depends on your expenses and whether you will use your principle up during retirement or keep it steady. Looking at a few different scenarios will give you a better understanding.

Four Percent Rule

Some advisers recommend the four percent rule, which involves withdrawing four percent the first year and increasing the amount by inflation each year. However, the four percent rule doesn't assure your retirement will last throughout your life.

The table below will show you how long each level of savings will last, assuming a five percent return, three percent inflation rate, and 15 percent tax bracket.

If you have saved Start with this annual withdrawal Your retirement will be used up in
$1,000,000 $50,000 per year 23 years
$500,000 $50,000 per year 11 years
$1,000,000 $40,000 per year More than 30 years
$500,000 $40,000 per year 14 years
$1,000,000 $30,000 per year More than 30 years
$500,000 $30,000 per year 19 years

Having $500,000 in the bank is unlikely to be enough. One million is closer, although it may still not meet all your needs if your annual expenses are near the national average of $50,000 when you retire.

Inflation

It's important to remember inflation. Inflation averages about three percent a year in the U.S., meaning, if you needed $50,000 a year when you turned 65, in only 10 years that income need would be $67,000.

Is One Million the Magic Number?

Many people have heard they need to have one million in savings to retire comfortably. The reason that number is thrown around is that, as Forbes notes, most experts predict around a five percent return on post-retirement investments once you retire.

If you have one million in savings, a five percent return allows you to get $50,000 a year without using up your principle. Of course, this doesn't take into account inflation or taxes.

As you can see in the table above, having $1M in the bank gets you a longer retirement, and can last your entire life if you are able to cut your expenses below the national average.

Circumstances Change How Much You Need

Everyone's life is different, and a variety of factors can impact how much you need to save for retirement. While the table above is a general rule, the following circumstances can mean you need to save more or less.

You Have a Disability or Illness

If your health is poor or you have a history of serious illness in your family, you will want to save more for retirement. Health care costs rise faster than inflation, meaning your financial need as you move through retirement will be much greater.

While you will have access to Medicare coverage, there are both monthly premiums and cost-sharing guidelines that make illness expensive. It's best to take care of your health to the best of your ability now and try to avoid having preventable diseases appear during retirement.

You Expect to Need Long-Term Care

woman with caregiver

Long-term care is quite expensive as well and will increase the amount you will need to save for retirement. The median cost in 2016 for a semiprivate room in a nursing home is $6,844 per month, which is more than $82,000 per year.

Long-term care insurance can help you pay for a nursing home if the need arises, but you need to purchase it between the ages of 52 - 64 for the best chance of qualifying. Costs vary depending on the benefits you select, but the policy can be a lifesaver if you need the care later in life.

You Have Additional Income for Retirement

Many people are counting on Social Security to provide a certain monthly income once they retire. There are Social Security income calculators available to help you understand how much you may receive, but the exact number will not be available for you until you retire. There is uncertainty regarding how well funded the program is, so you may want to reduce your estimate by 25 percent to be safe.

You may also be able to draw on these assets to help you in retirement:

  • Guaranteed pensions
  • Part-time work
  • Income from rental properties or other investments
  • Home equity

All of these income sources can reduce the amount of money you need to save. For instance, if you expect Social Security to give you $12,000 a year, and a pension will give you $10,000 per year, you can reduce your need by $22,000 a year. That can give you 10 or more extra years of retirement if you've saved $1M.

You Retire Later

You may choose to retire a few years later than 65 to reduce the number of years of retirement you need to cover. Retiring at 70 or later also increases the amount of your Social Security benefit a great deal.

If you were to retire at 70 instead of 65, a retirement account of $500,000 could last until your 89 if you are careful with your expenses or have additional income.

Save for Retirement Early

Almost everyone needs more retirement savings than they have today. The key is to start saving now. It may sound daunting to save $1,000,000 for your retirement, but if you start today and take advantage of compounding returns, you can do it more easily than you expected.

How Much Money Do I Need to Retire?