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How Much Money Is Enough to Retire?

The idea of what makes a comfortable or good retirement varies based on personal goals and preferences. But the fact that there is no one-size-fits-all amount each person needs to save shouldn't deter you from figuring out the best possible plan for your retirement.

How can you determine what that magic number will look like for you? Use these three steps to get clarity and confidence about where you stand in relation to your ultimate goal:

1. Determine Your Net Worth

You can define what financial success looks like in terms of your net worth. You need to start with your net worth to understand where you currently are financially so that you can develop a plan to get to your goal. (For more, see: Will Your Retirement Income Be Enough?)

Your net worth is all of your assets, minus all of your liabilities. Your assets are all your investments, bank accounts, cash, and could include your property (although some people leave out the value of their home from net worth calculations if they plan to live in it during retirement).

Your liabilities are your debts or anything that you owe: credit card balances, what’s left on your mortgage, other loans, and so on.

You can use a net worth calculator to help you, or you can talk to a financial planner who can review your finances and help you put together a comprehensive plan for your future.

The process can get overwhelming, especially if your net worth wasn’t what you were expecting. It often brings up a lot of questions about whether or not where you are today is good enough to get you to the financial future you want. It is important to be aware of these numbers so that you can start properly preparing for retirement.

2. Envision What Your Retirement Expenses Will Be 

Now that you know your net worth, or what your wealth looks like today, you need to understand the other side of the coin: where you want that net worth to take you. You can only know how much money is enough to retire by laying out what you actually want that retirement to look like. In other words, how much will your retirement cost you? What does that look like on an annual basis?

It’s difficult to know exactly what your expenses will be (especially if retirement is still a decade or so away for you), but you can start estimating. You can create a mock retirement budget to get a better idea of what your expenses will look like. To do so, start with the easy stuff: your set costs like living expenses and necessary bills. These might include:

  • Housing and utilities: Where do you want to live? Will you downsize or move to a vacation hotspot? Do you want to travel a lot? What does that mean for your permanent residence?
  • Transportation: Can you downsize how many cars your household maintains once you retire? Will you move to a place that’s more walkable or accessible by public transportation or will you move farther away from the city and expect transportation costs to rise?
  • Insurance premiums: What’s your plan for health insurance? Will you drop term life because you no longer have financial dependents? Do you need other types of protection instead?
  • Healthcare: Based on the benefits you can receive, what do your healthcare costs look like? Do you have an Health Savings Account (HSA) you can tap into? (For more, see: Saving for Retirement: The Quest for Success.)

Thinking about what your retirement will look like day-to-day, along with what bills you expect to continue to pay and which ones you’ll no longer need to take care of can help you build out the foundation of your budget. From there, you can consider what you really want and not just what you have to pay for. Think through your answers to questions like:

  • Will you travel or do you want to spend lots of time in your community?
  • Do you want to provide financial support to family members?
  • What kind of activities or hobbies do you want to pursue?
  • Will your lifestyle change and, if so, how?

It is a good idea to pad your budget a little bit with a few extra hundred dollars per month for unexpected expenses or costs you forgot to include. Then, you can multiply that budget by 12 to estimate how much your retirement will cost you each year.

Then, multiply that number by the amount of years you expect to be in retirement. If you retire at 65 and reasonably expect to live to 90, for example, then you should multiply your annual budget over 25 years.

3. Compare Existing Savings With What You Need for Retirement

If you came up with a retirement budget of $50,000 in annual spending, then you’d need $1,250,000 in your investment portfolio in order to safely retire today without running out of money.

Run your own budget numbers and then compare to the wealth you have to determine if you have enough. If you need help, this calculator can help you determine how long your retirement savings are likely to last or if you might outlive your current savings.

If you feel like you don’t have enough to retire, don’t panic. You might still be years out from a realistic retirement age, so you have time. Make the most of the last decade of your career and optimize your savings and investment strategy to grow your wealth. (For more from this author, see: How to Save for Retirement in the Gig Economy.)

Remember that you have options. You may be able to:

  • Reduce your retirement expenses, so you need less in savings to live on.
  • Create other income streams, so you don’t rely 100% on your savings.
  • Work part-time or slowly phase out of your existing career so you extend the amount of time you earn a paycheck, which reduces the burden you put on your nest egg.
  • You can also develop a smarter investment strategy now that allows you to make the most of your opportunities to put your money to work for you.

Still Not Sure? Use These Rules of Thumb

Feeling completely lost? Try using one of these rules of thumb to help estimate how much you need to have in the bank before you kick back from your career.

The first is called the “multiply by 25” rule. This guideline helps estimate the total amount of money you need to have saved by the time you retire in order to match your budget (which is the last step of the process we walked through above). Under this rule, you would multiply your annual budget by 25, giving you a target retirement amount. You should multiply your budget by however long you expect your retirement to last.

Or you could use the 4% rule. Instead of telling you how much you need to save, this calculation shows you how much of your existing nest egg you could safely withdraw and live on in a year. Most financial advisors consider 4%  a safe amount to withdraw from your nest egg each year that allows you to cover expenses, while also reducing the risk that you’ll run out of money in retirement. Of course, everyone’s situation is different and you may need a different estimation.

The rules of thumb suggested here are simple ways to arrive at estimates. They are not hard-and-fast answers that you should interpret as written in stone. If you want a more concrete answer, you should do an in-depth calculation to provide yourself with targeted savings goals and expected future returns.

Everyone's retirement needs and goals are different, which is why it's important to spend time analyzing your own financial situation to determine what is best for you. (For more from this author, see: 7 Steps to Being Prepared to Be Single After Retirement.)


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