How Much Do You Need For Retirement?

By on February 4, 2013


When it comes to retirement savings, there is no “one size fits all” approach. What works for the millionaire considering early retirement at age 40 will not work for the 60-year-old hourly employee who just started saving for retirement. To simplify the retirement dilemma, many people simply assume they need seven figures in the bank by the time they reach the “full retirement age” of 66 (as defined by the Social Security Administration in the USA) in order to live out their golden years in peace and comfort. Is this figure accurate? Not quite—and guess what? It could even be much less, depending on how much you spend each year.

The Case for Self Reliance

In 2008, we got a sample of just how volatile the stock market can be. The day after Lehman Brothers collapsed, the Dow Jones witnessed its greatest point loss since September 11, 2001. Millions of dollars in investments (particularly retirement funds) were wiped out in a fraction of the time it had taken for individuals to save up their nest eggs.

While the chance of economic turmoil is always a risk for anyone saving for the future, the stock market has been on the wobbly road to recovery in the past five years, and maintaining your own investments (through a 401(k) or IRA) is preferable to leaving your retirement in the hands of the government. Why? Well, if Congress is unable to pass significant Social Security reform within the next few years, the system is expected to be insolvent by the year 2037. Given the political shenanigans of Congress as of late (passing the debt ceiling at the last minute, averting the fiscal cliff hours after we supposedly went over it, etc.), Social Security will be rescued in some way, but instead of leaving the fate of your post-working years to the political climate in Washington, kudos to you for taking charge of your own financial future.

What Are You Spending Now?

Instead of calculating your needed retirement savings based on your annual income, consider your current budget (excluding funds diverted into retirement or general savings accounts). What are you spending money on that you may not need to be paying for once you retire? Mortgage payments? Car payments? College savings funds for your kids or student loan repayments for your own education? Will you need to pay for a retirement home or home care? Chances are, your current expense spreadsheet is different than what you’ll be paying later on down the road. All of these potential expenses influence the amount you’ll want to save for retirement, and unless you’re expecting a massive downsize in your lifestyle, it’s very important to save as though your life won’t change a bit once you’re retired (with the exception of not actually working or working vastly less than the usual 9 to 5).

Multiply by 30

While this may seem like you’re overestimating (or, if you’re lucky, underestimating) the years you have left after reaching 66, it’s always better to over-save than to reach your late nineties and wonder where you’re going to get the money to sustain yourself for the rest of your life. As such, I would advocate for multiplying your current annual spending figure by 30. This means that, if you spend approximately $30,000 per year, you ought to have approximately $900,000 when you retire. Some personal finance experts advocate for 25 (or even upwards of 35) instead, but the figure that’s right for you ultimately comes down to how much financial security you desire and how many years you have left to build up your nest egg.

Accounting for Inflation

The world is constantly in motion, particularly when it comes to the economy. What $5 bought you in 1983 takes nearly $12 to buy the same item in 2013. Not to mention the unpredictable fluctuations in gas prices (and the growing trend towards greener sources for heating and powering cars—which may increase energy costs later on), inflated food prices, etc. The point is: current events are strong indicators of what you’ll be paying more (or less) for in a few years, and although many of these events are macro in scope, they could directly affect you and your monthly budget in your retirement years. To cushion yourself from a potential spike in prices in the future, tack on a few extra thousand dollars (or more) to your previously calculated amount as a safeguard against inflation. For all its flaws, this is one thing Social Security does right: the Cost of Living Adjustment (COLA). Now take it a step further and apply the same principle to your own retirement savings for maximum financial security.

Final Word

Ultimately, there is no clear-cut answer to how much you need to retire, but using the ideas above can help you get an idea of what amount will be sufficient to maintain your current lifestyle for thirty plus years.

Money Street Smart recommends the following home care providers:

Photo Credit: TheeErin

Kelly Kehoe

About Kelly Kehoe

Kelly Kehoe is a full time college student and personal finance writer. In her free time she competes in speech and debate and writes fiction. Follow Kelly @kellypkehoe or on Google+.

Leave a Reply

Your email address will not be published.