The end of work doesn’t mean the bills stop. How much should you save for a wonderful retirement?
Key Points
- You want to replace 80% of your pre-retirement income to sustain your lifestyle in retirement.
- Retirement money: don’t only look at your savings. Look at income from social security and pensions.
- Determine the amount of the retirement nest fund required for sustainable income, using the 4% rule.
How much money do I need to retire comfortably?
How much money do you need to comfortably retire? $1 million? $2 million? More?
Financial advisors frequently tell you to replace roughly 80 per cent of your pre-retirement income to maintain your lifestyle when you retire. That implies that if you make $100,000 a year, you would want at least $80,000 in income (in today’s values) in retirement.
But when it comes to how much you need, various lifestyle aspects matter – and not all your income has to come from savings. And with that in mind, here’s a guide to help you work out how much money you will need to retire.
It’s not about money; it’s about income.
One crucial thing to note when calculating your retirement “number” is that it’s not about picking a precise amount of funds. For example, in the U.S., the majority of Americans say their retirement objective is a $1 million nest fund. But this thinking is wrong.
The single most critical issue in deciding how much you need to retire is whether you’ll have enough money to generate the income you need to sustain your preferred standard of living when you stop working.
Will a $1 million savings balance allow you to create enough income forever?
Maybe, but maybe not. That’s what we’ll determine in this article.
With income as the focus, the next question becomes: how much do you actually need to retire?
You don’t need to replace 100% of your pre-retirement income because you can typically eliminate certain expenses when you retire.
For example:
- Of course, you won’t need to save for retirement anymore.
- You could save on your commute and other work-related expenditures.
- You could have paid off your mortgage by the time you retire.
- If you don’t have dependents, you may not need life insurance.
But not everyone wants to retire on 80% of their annual income. You may need to adjust your objective depending on the kind of retirement lifestyle you’re aiming for and whether your spending will be quite different.
If you want to travel a lot, for example, you may want to aim for 90% to 100% of pre-retirement income. On the other hand, if you’re looking to pay off your mortgage before retirement or decrease your living arrangement, you may be able to get away with less than 80%.
Say you consider yourself to be the average retiree. You and your husband together earn $120,000 annually. If you use the 80% rule, you’ll probably need about $96,000 a year in retirement. That’s $8,000 a month.
Social Security, pensions, and other reliable income sources
The excellent news is, if you’re like most people, you’ll receive some aid from sources other than your savings, such as your social security income. For most individuals, Social Security is a major source of income.
But, in general, Social Security is expected to replace a smaller proportion of income for higher-income seniors.
For example, Fidelity forecasts that Social Security will replace 35% of the income of someone making $50,000 a year. But for someone earning $300,000 a year, the average Social Security replacement rate would be just 11%.
If you’re unclear on what benefits to anticipate, check your most recent Social Security statement or sign up for a My Social Security account for a more precise estimate based on your work history.
Please keep in mind pensions from current or previous work. That’s true for other permanent, predictable sources of income, such as an annuity that begins after you retire or a reverse mortgage.
Let’s imagine, for example,
You’re a couple who require $8,000 a month in retirement income. Each spouse expects to receive $1,500 per month in Social Security benefits, and one spouse receives a $1,000-per-month pension.
That implies $4,000 will be assured income from the $8,000 monthly income requirement. The other $4,000 will have to come from your stocks and savings.
Having reviewed income sources, let’s determine the savings needed to bridge any remaining gap.
Once you know how much income you’ll need from your savings, the next step is to determine how big your retirement nest egg has to be to provide that much income for all time.
One is a retirement calculator. The other is the 4% rule, which allows you to withdraw 4% of your retirement assets in your first year.
So if you had $1 million saved, you’d take $40,000 in your first year of retirement, either as a single amount or as a series of instalments. Then, in later years of retirement, you would increase this amount to match the rising cost of living.
If you follow this guideline, you won’t run out of money in retirement. The 4% rule is only a guideline for giving your money a good chance of lasting at least 30 years.
We learned in the last part that our couple would need $4,000 a month ($48,000 a year) from their savings. So in this scenario, they would want $1.2 million in their retirement accounts, such as a 401(k) or an individual retirement account (IRA), to provide $48,000 per year in sustainable retirement income.
However, it is important to note that the 4% rule has significant restrictions. It implies you will withdraw the same amount every year in retirement, adjusted for inflation. It also implies that throughout your retirement you would have a mix of stocks and bonds in your portfolio.
Occasionally you may wish to take out either much more or much less than the typical 4%. For example, by mid-December 2025, the S&P 500 index had risen about 19% year to date — so you’re replacing your 4% withdrawal rate plus a tonne more. If you are in a stock market downturn or bear market, you may wish to restrict your withdrawals so your investments may have time to recover.
Whatever your retirement aspirations, the recent stock market volatility suggests some cash on hand for retirees. This might serve as a cushion for your portfolio when selling assets in a down market.
Things to consider when planning retirement goals
There is no single best way to determine your retirement savings goal. Investment performance may change over time, and it may be difficult to accurately forecast your actual income requirements.
It’s important to understand that not all retirement plans are created equal when it comes to income. Income tax applies to money you remove from a regular IRA or 401(k). The money you withdraw from a Roth IRA or a Roth 401(k) is normally not taxed, which can slightly skew the computation.
There are many additional possible concerns. Many workers are forced into early retirement against their will. For example, about 3 million workers retired earlier than planned in 2020 because of the COVID-19 pandemic.
Layoffs, health difficulties, and caring responsibilities typically push older people out of the labour force. A longer-than-expected retirement means you’ve got a safety buffer.
It is also crucial to evaluate how inflation may affect your retirement goals. Inflation has been in the spotlight in recent years, following the highest inflation in a generation.
Inflation is worse for elderly families than for working-age families, even when expenses grow at a normal pace. That’s because older people spend a bigger share of their income on things like health care and housing, which tend to grow more quickly than the general rate of inflation.
While we’re trying to give you the big picture here, it’s still a sensible idea to consult a financial adviser who can customise a retirement savings target for your specific circumstances and help you put together a savings and investment strategy to ensure you meet your objectives.
By applying the above methods, you can form a solid starting point toward your retirement savings goals.
The $23,760 Social Security bonus most retirees completely overlook
Most Americans, if they’re honest, are a few years (or more) behind on their retirement savings. But a few little-known “Social Security secrets” can help secure an increase in your retirement income.
For example, one simple method might earn you an extra $23,760 per year! Once you know how to maximise your Social Security payments, we believe you can retire confidently with the peace of mind we’re all looking for.