Retirement. It’s one of those life events we all know is coming, but somehow, it always feels like it’s way off in the distant future—until, suddenly, it’s not. The idea of kicking back, traveling, or just relaxing at home, free from the daily grind, sounds like a dream. But then comes the big, inevitable question: how much money will you really need to retire comfortably?
Let’s take a deep dive into how you can start calculating your retirement needs and explore some things you might not have considered.
The Retirement Landscape Has Changed—A Lot
The way we think about retirement today is very different from what it used to be. Your grandparents probably retired with a pension and didn’t have to worry too much about whether their savings would last.
Today, however, pensions are a thing of the past for most people, and we’re largely responsible for funding our own retirements through savings, investments, and Social Security.
On top of that, people are living longer than ever. In 1950, the average life expectancy in the U.S. was around 68 years. Now, it’s closer to 80. If you retire in your mid-60s, that could mean you’ll need enough savings to last for 20 or even 30 years. It’s no longer just about whether you’ll have enough to cover your basic expenses—you’ll also need to plan for healthcare, inflation, and the possibility that you’ll want (or need) to work part-time at some point.
The good news? While the landscape may look a little more uncertain than it did for previous generations, we have more tools, resources, and financial strategies available to help plan for a secure retirement.
A Retirement Number Isn’t One-Size-Fits-All
So, how much money will you really need? The truth is, there’s no universal answer. Your “retirement number” will depend on a variety of factors, including your lifestyle, location, and health. Still, there are a few general guidelines that can help you get a sense of where to start.
1. The 80% Rule
One of the most common rules of thumb is the 80% rule, which suggests that you’ll need about 80% of your pre-retirement income each year to maintain your standard of living in retirement.
Why 80%? The idea is that some expenses, like commuting, work clothes, or retirement savings contributions, will go down once you retire. But you’ll still need to cover basics like housing, groceries, and healthcare. Of course, this rule is just a starting point and may not apply to everyone. If you plan on traveling extensively or taking up new (potentially expensive) hobbies, you might need more than 80%.
2. Multiply Your Income by 25
Another popular rule is the multiply-by-25 rul This method involves estimating how much money you’ll need each year in retirement and then multiplying that number by 25. For example, if you anticipate needing $80,000 a year, you’d multiply that by 25, meaning you’ll need $2 million saved to fund your retirement.
This rule is based on the assumption that you’ll withdraw 4% of your savings each year, which is widely considered a safe withdrawal rate. The idea is that by withdrawing 4% of your portfolio annually, your savings should last for 25 to 30 years, assuming you’re invested in a balanced mix of stocks and bonds. But keep in mind that this is a general rule and may not account for unexpected expenses like major health issues or market downturns.
Lifestyle Matters—A Lot
Now that we’ve covered some basic formulas let’s talk about how your unique lifestyle choices could impact your retirement needs. After all, no two retirements are exactly the same, and how you want to spend your golden years will play a big role in determining how much money you’ll need.
1. Where Do You Want to Live?
Location is one of the biggest factors that will affect your retirement budget. Where you live has a direct impact on the cost of living, from housing and taxes to healthcare and everyday expenses. For instance, retiring in a major city like New York or San Francisco will cost a lot more than living in a smaller town or rural area.
Some retirees even opt to move abroad to countries where the cost of living is significantly lower. Places like Mexico, Canada, and Japan have become popular destinations for retirees looking to stretch their dollars further. But before you pack your bags, be sure to consider the cost of healthcare, insurance, and potential tax implications of living in another country.
2. What Will Your Day-to-Day Look Like?
Are you planning on traveling the world? Taking up new hobbies? Volunteering or starting a side business? Your daily activities will also play a big role in how much money you’ll need in retirement.
If your vision of retirement involves lots of travel and expensive hobbies like golfing or boating, you’ll need to account for those costs. On the other hand, if you’re more of a homebody who plans to spend time gardening or spending time with family, your expenses could be lower than expected.
It’s also worth considering that your spending habits might shift throughout retirement. Many people find that they spend more money in the early years of retirement when they’re more active and less as they get older. Keep this in mind when mapping out your retirement budget.
The Healthcare Wildcard
One of the most unpredictable expenses in retirement is healthcare. And unfortunately, it’s also one of the largest. While Medicare can help cover some costs once you hit age 65, it doesn’t cover everything—like long-term care, dental, or vision.
1. Health Savings Accounts (HSAs)
If you’re still working and have access to a high-deductible health plan (HDHP), you might consider contributing to a Health Savings Account (HSA). HSAs offer a triple tax advantage: your contributions are tax-deductible, your investments grow tax-free, and withdrawals for qualified healthcare expenses are also tax-free.
HSAs can be a powerful tool for covering medical expenses in retirement, especially because the funds roll over from year to year and aren’t tied to your employer. If possible, maxing out your HSA contributions could give you a nice cushion for healthcare costs down the line.
2. Long-Term Care Insurance
Another option to consider is long-term care insurance. This type of insurance helps cover the cost of long-term care services, like nursing home care or in-home care, that aren’t covered by Medicare.
Long-term care insurance isn’t for everyone—it can be pricey, and not everyone will need it. However, it’s worth looking into, especially if you have a family history of chronic illness or foresee needing extended care in the future.
Don’t Forget About Inflation
Ah, inflation—the sneaky force that eats away at your purchasing power over time. While inflation might not feel like a pressing concern today, it can have a big impact on your retirement savings over the long term.
This is why it’s so important to invest in assets that could outpace inflation, like stocks or real estate. Even in retirement, keeping a portion of your portfolio in growth-oriented investments can help protect your purchasing power and ensure that your savings last.
Social Security: How Much Can You Rely On?
For many retirees, Social Security provides a significant portion of their income. But here’s the thing—it’s not designed to cover all of your expenses. While that might cover some basic expenses, it’s likely not enough to fund a comfortable retirement on its own.
When deciding when to claim Social Security, think about your overall financial situation, your health, and your other sources of retirement income. It’s a personal decision, and there’s no one-size-fits-all answer, but waiting to claim your benefits could be a smart move if you expect to live a long, healthy life.
Creating a Retirement Spending Plan
A retirement spending plan is essentially a roadmap for how you’ll use your savings and investments to cover your expenses once you stop working. It should outline your essential expenses (like housing, food, and healthcare) as well as discretionary expenses (like travel, hobbies, and entertainment).
Here’s a simple framework to get started:
- Estimate Your Annual Expenses: Break down your expected costs into essential and discretionary categories. Don’t forget to factor in healthcare, taxes, and inflation.
- Determine Your Income Sources: Identify all the income you’ll have in retirement, including Social Security, pensions, investment withdrawals, rental income, and any other streams of income.
- Calculate Your Withdrawal Rate: Based on your estimated expenses and income, determine how much you’ll need to withdraw from your savings each year. The 4% rule is a good starting point, but you may need to adjust depending on your risk tolerance and the size of your nest egg.
- Adjust as Needed: Retirement is not static. You might need to adjust your spending plan over time, depending on how the markets perform or how your lifestyle changes.
The Bottom Line
At the end of the day, how much money you’ll really need for retirement depends on a variety of factors—your lifestyle, health, location, and how long you live. While it might feel overwhelming to try to pin down a specific number, the key is to plan, stay flexible, and be prepared to adjust as your circumstances change.
