How Much Retirement Money You Need Answered

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Have you wondered how much money you will need in retirement?  There are two easy to use to retirement estimators that can give you a good idea what you will need when the day comes for you to retire.

If you’re anything like I used to be, you are contributing to a retirement savings plan which is great.  However, the problem is you haven’t actually thought about how much you will need when you retire. 

Some people may even be using a 401K estimator to determine if they are on track for retirement savings.  Unfortunately, the 401K estimator doesn’t know your unique circumstances or how your financial needs may change in retirement.

how much retirement money

However, your chances of having enough saved for retirement significantly increase if you have a target goal in mind.  So, if you’ve never used a 401K estimator before take a few minutes now and use these retirement estimators.  These retirement estimators will give you at least a rough idea of how much you will need to save for retirement.   

I was shocked by how much my husband and I need to save for retirement at our current lifestyle.  Admittedly, I am forever grateful that I now know what our goal is.

Determine How Much Retirement Money You Need

These 2 retirement estimators will be most beneficial for those who have a good idea how much their expenses will be in retirement.  If you don’t know, I strongly suggest tracking your expenses for a couple months when you have time. 

Knowing what your current expenses are and how they might change in retirement is critical in determining what your monthly expenses in retirement may look like. 

All in (mortgage payment, transportation cost, food, insurance, taxes, 401k savings, etc) my husband’s and my current monthly expenses are roughly $10,000 per month. 

In retirement, we won’t have a mortgage payment, 401k savings, college savings for our kiddos or childcare expenses.  Our food and transportation costs will likely go down as well. 

4 rule retirement

Without the additional expenses we have today, our basic living expenses would be about $4,500/month or $54,000 annually.  This includes $1,000/month for healthcare expenses in retirement.  $1,000 a month may seem like a lot for healthcare in the beginning, but healthcare expenses increase as you get older. 

In a 2019 Fidelity study, the average couple retiring in 2019 will spend $285K in healthcare expenses so stay active and eat well.

Do you have access to a Health Savings Account (HSA)?  Read here why an HSA is pure gold when it comes to retirement savings!

2 Retirement Estimators For Retirement Planning

#1 – Multiply by 25 Rule

A general rule of thumb to determine the amount you will need in retirement is to take your expected annual expenses in retirement and multiply that number by 25.  For example:  $50,000 per year in expected retirement expenses X 25 = $1,250,000 in Total Retirement Savings Required.  This rule assumes you will have an annual return of investment of at least 4% and you will follow the 4% withdrawal rate rule.

#2 – The 4 Percent Withdrawal Rate Rule  

This rule of thumb says you can withdraw 4% of your retirement account each year.  This should allow you to safely withdraw $50,000 in year one of retirement.  

The rise of inflation is calculated into the 4 percent rule and assumes the amount withdrawn each year in retirement will increase by the current amount of inflation each year.  The average inflation rate in the US over the last century is about 3%.  At a 3% inflation rate, $50,000 withdrawal in year 1 of retirement will increase to $51,500 in year 2 of retirement and $53,045 in year 3 of retirement. 

A gentleman by the name of William Bengen came up with this rule and published his findings in the 1990’s.  The rule was tested using historical data up to that point including the great depression.  It was further tested with more recent data.  The rule has held up throughout the markets ups and downs.

Is the 4 Percent Rule Still Good?

There are conflicting views on the 4 percent rule and whether it still applies.  The 4 percent rule:

  1. was designed to succeed for 30 years.  People continue to live longer.  Planning for 30 years may not be enough, especially for those in their 20s and 30s.
  2. assumes an investment portfolio mix of 60% stocks, 40% bonds.  Returns on bonds have significantly dropped since the 90’s when this rule was developed.

While potentially flawed, the 4 percent rule is a good guide and can be a useful tool for planning for retirement.  However, the greatest tool when it comes to money in retirement is flexibility. 

There are a variety of strategies to help stretch retirement money should the need arise.

  1. If the market declines sharply in the first few years of retirement, cut back and spend less on the “extras”.
  2. Consider a more aggressive portfolio mix (a 60% stock and 40% bond mix may not be the right balance).  Index funds offer a low cost option, often with a good return on investment.
  3. Don’t increase withdrawal rate (to account for inflation) during a market decline.

How Taxes Can Affect How Much Retirement Money Is Needed

It is important to note that the 4 percent rule can be greatly impacted by pretax saving accounts like a traditional 401k.  Money withdrawn on a traditional 401K in retirement has not been taxed and will be taxed in the year it’s withdrawn. 

The tax rate in 2018 on $50,000 is 22% in just federal tax alone.  That means the amount you will need yearly in retirement is an additional $11,000 for federal taxes. 

There is no way to know what the tax rate will be in the future.  Taxes associated with a traditional 401K is a wild card that cannot be overlooked when planning for retirement.

A potential offset to this is dividends or capital gains distributions you may receive from stocks that are paid in cash and not reinvested in your portfolio.  Taxes could be paid by the amount in annual cash received from dividends or capital gains distributions.  This will require planning and adaptability as rules for stocks change over time.

how much retirement money

Beyond These 2 Retirement Estimators

At our current lifestyle, in retirement my husband and I will need roughly $1.65M ($54K/year x 22% in taxes) – not counting for inflation.  

This calculator lets you see how much money in monthly savings today will amount to in retirement.  There’s a second calculator in that link that will even let you see how inflation effects the amount you truly need.  With inflation factored in, my husband’s and my retirement number is closer to $2.2M.  

This calculator only allows you to put one flat investment amount per month or year.  If you want to factor in annual increases, check out this calculator.  It allows you to include an annual percentage increase to the amount you are saving. 

As I make monthly contributions, I put in $0 for the annual calculation section and populated the monthly section with my contribution amounts.

How Much Retirement Money Should You Save

That depends on you.  Unfortunately, there is no hard and fast calculation that will tell you exactly how much money you need to have saved for retirement. 

All the multiple by 25 rule and 4 percent rule can do is give you guidance.  Smart planning and a willingness to be flexible will be your greatest tools for deciding how much to save before you retire.

Next Steps

Knowledge is power!  The sooner you figure out how much you will need in retirement the sooner you can start saving properly for it. 

A good book to supplement your retirement savings plan is The Simple Path to Wealth by J.L Collins.  The book goes into great detail and also breaks down investing into easy to follow steps.  J.L. Collins simplifies investing for the average every day person.  I highly recommend checking out this book.


Subscribe here to join me on my journey forward as I explore ways to save money and reach my retirement goals faster.  I will be exploring ways to save money on food, exercising and housing expenses without cramping my lifestyle. 

Even if you are on track to reach your retirement goals on time, many of the recent changes I have implemented are not just saving me money but adding valuable time back into my day.  I bet everyone can use more time in their days. Step into more time and money!

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