How Much Do I Need to Save to Retire?

Friday, Jan 31, 2020

Retirement is a large part of “the American Dream” for most people.  We look forward to a time when we can stop working and live out our golden years in comfort and with dignity.  If this dream exists for you, at some point you will probably stop and ask, “How much do I need to save to retire?” This is an essential question and the answer can vary quite a lot from person to person. The amount you need to save depends on how much you intend to spend in retirement, how much you currently have saved, how long you have left to work, and what income streams will be available to you in retirement. Everyone has a retirement income plan, whether they know it or not. Some choose to prepare in advance and plan for what they want their lifestyle to look like after their working years, while others choose to avoid planning and are often surprised or even fearful as they approach retirement age.


We will review a few general aspects of retirement planning and their definitions in order to understand how a typical retirement plan works. Then we will discuss a real-world example, bringing all these concepts together.

Step 1:  Determine Retirement Spending Goals

Older Gentlemen Walking on Beach

Everyone has a current lifestyle cost. This is the amount of money spent on an annual or monthly basis in order to fund your life. When considering retirement spending, you will have basic expenses (bills, groceries, gas, etc.) and discretionary expenses (dining out, travel, etc.). Some of these expenses happen every month while others may happen once a year. To begin to understand how much you need to retire comfortably, first calculate your lifestyle costs today, regardless of your age, and adjust that number for what is likely at retirement time. Using a cash flow worksheet like this will be very helpful.

Here are a few common changes at retirement time to one’s lifestyle cost. For example:

  • Many people pay off their real estate mortgage prior to retirement. So, while that is a cost today, you may be able to remove it from your future needs.
  • Inflation is another large factor in determining how much you will need in retirement. An expense of $10,000 today will be equivalent to $12,189 in 10 years with a 2% inflation rate.
  • There are nondiscretionary expenses that could be greater in retirement. For example, medical insurance will now be an out-of-pocket expense rather than employer paid.
  • Lastly, there are often several discretionary expenses that are added to the plan like additional travel or other purchases related to retirement lifestyle.

Step 2:  Compile Current Savings

Feeding the Piggy Bank - How Much Do I Need To Retire?

The amount you have saved will contribute to the amount of retirement income you will be able to generate. It is important to sum up all your current savings.  The definition of savings can vary widely. One can save money into retirement accounts, real estate, business ownership, cash, and many other types of assets.

Typical savings accounts for retirement purposes are 401(k)s, IRAs, Roth IRAs, Investment Accounts, etc. These types of assets are liquid and can be used to create income in retirement. These accounts will vary in how they are taxed. It is important to understand what the value of your liquid assets are today, how they will be taxed, and what they are projected to be at retirement.

Real estate is an example of an asset that is not liquid. You may have a large amount of equity in your home, but that does little to help generate income in retirement. Many people’s largest asset is the equity in their home, so their net worth may seem large while their ability to create income is limited. Similarly, business ownership equity is also only valuable if someone is willing to buy out the equity in the business so that the owner can then use the proceeds to produce income.

Step 3:  Factor in Length of Time Before Retirement

Stacks of Coins and Clock

Perhaps the greatest asset in financial planning is time. Having time allows you to take advantage of the growth potential of an investment and compound over time, perhaps requiring less contribution. The older you are, the more you will need to save out of pocket to accomplish your goals. As an example, if one saves $10,000 at age 30 and earns an annual rate of return of 7.2%, that investment will be worth $80,000 at age 60. But, if one saved the same $10,000 at age 40 and earned the same rate, the investment would only be worth $40,000 at age 60. The additional 10 years of time, with compounded interest, doubles the ending value! Therefore, the amount the one needs to save in order to retire is very dependent on the length of time they have until retirement. If you can predict how long you have left to work, you can figure out how much is needed in savings on a monthly basis to accomplish your goals.

Step 4:  Determine Income Streams Available to You

Rolls of Dollar Bills

Some people may also have income from sources like a pension or rental real estate property.  Most people who have worked in the United States will have social security income that will supplement any other income generated from saved assets. The Social Security Website has a great estimator tool that will give you an idea of expected benefits.

See:  4 Key Factors to a Solid Social Security Strategy

Step 5:  Put Together Your Plan

Financial Planner Working at a Computer

A complete retirement plan incorporates all 4 of the factors above to determine how much you should save for retirement. At 5280 Associates, we take it further by making tailored recommendations on the most efficient ways to save in order to reach your goals.

Conclusion: A hypothetical example of a Typical Couple

Meet Bob and Jan. They are married, the same age, and have worked for 30 years, earning a household income of $80,000. Their retirement income effective tax rate is 20%. In order to live the lifestyle, they desire, Bob and Jan have calculated they will need $100,000 per year at retirement,

At age 67 they will have a household social security income of approximately $50,000 after tax, per year. They will need to generate an additional $50,000 of income per year in order to accomplish their goal of $100,000 total. In order to generate $50,000 after tax they would need to have saved approximately $1,200,000 in retirement assets. In order to save 1.2 million in assets they would need to save about $785/mo. and earn a 6% rate of return from age 30 until age 67. If they started to save at age 40, they would need to save about $1,570/month in order to accomplish the same goal.

With professional guidance and expert planning, Bob and Jan will be able to reach their retirement goals.  Have you started thinking about retirement savings? Does it overwhelm you or make you feel excited?  Either way, 5280 Associates is here to help you develop and put your plan into action.

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