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Determining How Much You'll Need to Retire

Most people look forward to their retirement, dreaming of a lifestyle in which they have the freedom to spend their day as they wish and answer to no one. But deciding when to retire requires calculating how much money you'll need to retire, which involves some introspection, guesswork, and analysis.

Key Takeaways

  • There is no one-size-fits-all plan when it comes to how much you'll need to retire, but there are a few rules of thumb.
  • Some strategies call for having 10-12 times your final working year's salary, or specific multiples of your annual income that increase as you age.
  • Consider when you want to retire, retirement goals, annual salary, any expected annual raises, inflation, investment portfolio performance, and potential healthcare expenses.

Rules of thumb

Everyone has different needs, wants, and goals for retirement, so there isn't a one-size-fits-all plan that will work in any scenario. Thankfully, financial professionals have created a few rules of thumb over the years that have varying pros and cons, but give more insight than "save as much as you can."

  • The Final Multiple: 10-12 times your annual income at retirement age. If you plan to retire at 67, for instance, and your income is $150,000 per year, then you should have between $1.5 and $1.8 million set aside for retirement. A multiple of your final working year's income is appealing to use as a guidepost because it's easy to calculate, especially the closer you are to retirement when your final annual compensation is easy to estimate.
  • The Pacing Angle: a multiple of your annual income at your current age. At age 30, some financial professionals suggest accumulating the equivalent of your current annual income. By age 40, you should have accumulated three times your current income for retirement. By retirement age, it should be 10-12 times your income at that time to be reasonably confident that you'll have enough funds.
  • Seamless Transition: enough to replace 60%-100% of your pre-retirement annual income. This rule of thumb aims to maintain a quality of life similar to the one you enjoy immediately prior to retirement, while keeping in mind the realities of different budget levels per line item, like lower work-related and housing costs likely offset by higher healthcare costs.
  • Join the Club: $1 million-$1.5 million. Becoming a "millionaire" is still an impressive financial milestone, but $1 million today doesn't go nearly as far as it did in 1980, when $1 million had the same buying power as $3.1 million today.

Following any of these rules of thumb can help you plan for the future, but they also oversimplify the calculation because there are so many factors — such as your unique retirement vision — which can affect your own estimation.

Factors that impact how much you'll need to accumulate

As is the case with all estimates regarding the future, dozens of variables will factor into your estimate, making it a challenge to calculate accurately.

The first things you'll need to contemplate are when you want to retire and what you would like to do, as those will help you answer the question, "how much money is enough?" Traveling the world would likely cost more than spending most of your time with young grandchildren, for example. Further, some people retire from their primary career and then embark on a post-retirement career, earning supplemental income.

Then, for your remaining working years, you'll need to estimate your annual salary, expected average annual raises, inflation rates, investment portfolio performance, and more.

For post-retirement life, you'll need to estimate how long you think you'll live and therefore how many years you'll have in retirement. Your anticipated health is an important factor, too, due to the rising costs of healthcare and long-term care. And don't forget about the status of Social Security. In fact, many people use their expected income from Social Security as a starting point for creating a retirement budget.

Retirement asset scenarios

Depending on how all of these variables look in your situation, it might mean the rules of thumb won't work for you. Fortunately, it's easy to use online retirement planning calculators to get a reasonable idea of whether you are on track to be where you want to be. Retirement calculators can help you answer how much you'll need to defer for retirement given how much you currently have accumulated, how much you earn, when you would like to retire, and even how much you think you'll spend, given your retirement lifestyle. They give you the flexibility to create scenarios so you can set realistic expectations.

Here are two scenarios to help illustrate how they work.

Scenario 1: Monica, age 40, aims to retire at 62 and currently earns a salary of $125,000 per year, of which she consistently sets 15% aside for retirement. As a result of planning for retirement since she began working, she has accumulated $450,000. She estimates that she will spend 90% of her final working year's salary while retired.

Using assumptions about average annual raises (2%), investment performance before and after retirement (7% and 4%, respectively), inflation (2%), and retirement length (25 years), our retirement calculator estimates that Monica could retire at 62 and — 25 years later — will still have about $581,000 in retirement assets. That means she is likely to have a cushion for her 90s, if she is fortunate enough to live that long.


Scenario 2: Steve is 30, earns $80,000 per year, and has followed a rule of thumb by accumulating $80,000 for retirement to date. He has made similar assumptions as Monica, except he defers 10% per year for retirement, he wants to retire at 65, and he thinks he'll spend 100% of his final year’s salary while retired.

Unlike Monica, however, Steve's current salary and deferral rate take him to age 87 before he runs out of retirement assets. Since Steve is planning on a retirement length of 25 years — taking him to 90 — he'll need to change his plan if he wants to get there with some funds leftover.


The bottom line

So how much money do you need to save for retirement? As you can see, that's a question that requires a fair amount of introspection and analysis. There are rules of thumb that might help guide you, but putting in a little extra effort — by creating a spreadsheet or making an appointment with a financial professional — might be worthwhile.

More information

Everyone has their own expectations and goals for retirement. To learn how we can help you prepare for the retirement you want, schedule a Citizens Retirement Checkup at your nearest Citizens Bank branch.

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