How much money will you need to retire? Probably more than you think! Extended life spans, reduced employer benefits, lower market returns and increased costs of living have forced us to have to save more. Unfortunately, most Americans are doing a poor job of securing their future. The Employee Benefits Research Institute reports that if current trends continue, by 2030, the annual shortfall between the amount retired Americans need and the amount they actually have will be at least $45 billion. If you want to avoid having to flip burgers at age 75, one of the best things you can do for yourself is to calculate now how much you'll need in the future.

The Need to Plan
Two generations ago, corporate pensions and social security ensured a secure retirement for our grandparents. Today, pension plans have become virtually extinct, shifting the burden of retirement savings away from corporations and onto the employees. Our retirement depends largely not only on our own ability to save and invest wisely, but also on our ability to plan.

According to a survey from Allianz Life, 28% of workers between ages 55 to 65, are concerned they won't be able to cover basic living expenses in retirement. Most of these people will be forced to extend their work years or accept living in poverty. How can this disastrous scenario be avoided?

How Much You Need in Total
Your first step in planning is determining how much you'll need.

Many studies indicate that retirees will need to between 70% to even 100% of their pre-retirement income to maintain their current standard of living. So, a reasonable target is one that will provide you with an annual income similar to the income you have now. Then you need to consider a "safe" withdrawal rate. This is the percentage of your retirement nest egg you will withdraw each year during your retirement. Research indicates that, if they have saved enough, retirees can best preserve their assets if their annual withdrawal rate is 6% or less. This provides a quick and dirty formula for determining the total amount you need to save by retirement: divide your desired annual income by the withdrawal rate.

So, for example, if you want to target a retirement income of $60,000 per year, you need to save $1 million ($60,000 / 0.06). The following table offers some quick estimates of how much you might need to accumulate before you can retire.

Annual Retirement Income Need Total Nest Egg Required (Estimate)
$50,000 $833,333
$100,000 $1,666,667
$175,000 $2,916,667
$250,000 $4,166,667


How Much You Need to Save Each Month

Keep in mind that the above table is based on a rough formula. When calculating your target nest egg, and how much you have to save each month to reach that target, there are many factors that come into play:

  • Your current age.
  • Intended retirement age.
  • Life expectancy.
  • Current earnings.
  • Income sources during retirement.
  • Amount of current retirement savings.
  • Expected savings contributions.
  • Cash outflows during retirement.
  • Portfolio risk/return.
  • Inflation.

Incorporating some of these factors, the following table illustrates how much you'd need to save each month, if you started from zero at various years before retirement, to realize a $1 million savings. The table assumes that your annual investment rate of return on your savings is 8% (which cannot be guaranteed).

Number of Years Left
Until Retirement
Monthly Amount Required to Save
(to attain $1 million goal)
35 $435.94
30 $670.98
25 $1,051.50
20 $1,697.73
15 $2,889.85
10 $5,466.09
Assuming an 8% Rate of Return

Clearly, planning for retirement is not something that you do shortly before you stop working. Because of the magic of compounding, the earlier you start, the less you'll have to save on a monthly basis - as illustrated in the table above. Lower rates of return or higher inflation, of course, will require a much higher contribution.

Planning for retirement is a lifelong process. Throughout your working years, your planning will undergo a series of stages in which you will evaluate your progress and targets and make decisions to ensure you reach them.

Resources for Saving for Your Future
Now that you have an idea of how to determine how much you need, it's time to start using the tools available to you. First you need to learn about the types of retirement savings accounts, such as IRAs - and start reaping the associated tax benefits.

The Bottom Line
In summary, planning for your retirement is an ongoing process. The earlier you start, the better off you'll be. The key is to save, save, save! The more time you have on your side, the better your outcome should be. This requires discipline, self study and time. So, take advantage of the many tools available to ensure your success.

Related Articles
  1. Budgeting

    5 Ways To Stretch Your Retirement Budget

    Living comfortably can be easy if you follow a simple plan.
  2. Budgeting

    Managing Income During Retirement

    Learn some sensible strategies for making your hard-earned savings last for as long as you need them.
  3. Retirement

    Preparing To Tap Into Retirement Income

    You need to plan ahead to ensure a long and happy future away from the daily grind.
  4. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  5. Professionals

    How to Protect Elderly Clients from Predators

    Advisors dealing with older clients face a specific set of difficulties. Here's how to help protect them.
  6. Professionals

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  7. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  8. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  9. Professionals

    How to Build a Financial Plan for Gen X, Y Clients

    Retirement is creeping closer for clients in their 30s and 40s. It's a great segment for financial advisors to tap to build long-term client relationships.
  10. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
RELATED TERMS
  1. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  2. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  3. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...
  4. Mandatory Distribution

    The amount an individual must withdraw from certain types of ...
  5. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  6. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
RELATED FAQS
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  3. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  4. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  5. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
  6. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!