How Much Do I Need To Retire?

Let’s face it, you’re here because you want to know how much money you need to retire.  Plenty of people love their jobs… but at some point, it’s time to call it quits.  Maybe you’re already at that point.  Maybe it’s decades away.  In order to retire comfortably, you need to know how much money to put aside for that day.

Why is it so important to know how much you'll need?  Without knowing, how are you supposed to save for that day?  The lifestyle you enjoy during your golden years is dependent on saving that amount.  Having too much money won’t be a problem, but finding out you saved too little too late can be devastating.

 How Can You Start?

There's a few ways to start retirement planning.  There’s the option of spending hours searching around the internet.  You’ll find tons of info on investing and saving.  You can reach out to your bank, and they’ll talk at length about the products they want to sell you. You can turn on any of the 24-hour news channels devoted to talking about the market.  There’s also plenty of talking heads on the radioT.V., and the internet that offer general financial advice.

The problem is, the amount you need to retire is unique to your situation is.  Generic advice isn’t going to cut it when it comes to something as important as your retirement.  It takes time and effort to calculate how much my clients need to cover their retirement expenses.  If you’re like most people, you may want a simple calculation to know how much you're going to need.  

However, this is a complex calculation with many factors considered.  This is to ensure you are comfortable and prepared for possible changes to your personal situation during retirement.  It's best to have an idea of how your number is calculated so you'll know what kind of income you're going to need during retirement.

How Does a Financial Advisor Plan

Deciding how much a client needs in retirement is not an easy task.  It’s even more difficult the further away retirement is planned.  There are a few different ways we can go about determining how much is needed.  To begin with, let’s look below to see the Bureau of Labor Statistics (BLS) data on the average annual expenditures both before and after retirement.

BLS Retirement Statistics
BLS Retirement Statistics

What you are looking at is the mean average of spending before and during retirement.  There is an obvious decline in spending in retirement.  There are a couple points to make.  First, this is the average of everyone in the U.S.  Are you average?  Second, are people spending less because their needs are less... or is it because they ran out of money?

Average Retirement

Living on less than $37,000 a year in retirement may not be an ideal situation for some.  That’s why you need to know your number.  But there’s a problem.  We’re looking at the average spending from 2014.  Inflation runs at around 3.22%. If you plan on retiring in 2034, the mean average spending for retirees age 65-74 rises to $92,140!!  And that’s just to be average.

If you're reaching out to a professional, you're not the average person.  Of course, if you're reaching out to a professional, you are also smart enough to know that we’re not fortune tellers.  Since no financial advisor has the ability to see the future, we rely on historical data.  This is why we need to collect and analyze information about your individual situation.  The includes factors like your age, when you want to retire, household income, budget, risk tolerance and so on.

For people that are further from retirement, we know that their situations can change.  This makes accuracy in the search for a client’s number more difficult.  Starting with a benchmark number will help, but you need to revisit your saving strategy as life changes.

Retirement Expenses

In plain English, you need to consider your current income and make the assumptions about the future.  If you look at the BLS average, you’ll see that almost all of the expenses in retirement are down. There are several reasons including expenses like your home and cars being paid off.

In 2008, Aon Consulting published a report on retirement replacement needs. Their findings help establish a benchmark for those further away from retirement.  The lower the average household income, the higher the replacement ratio is.  For example, a person who earned $20,000 a year would need $18,800 a year to maintain their lifestyle.


The chart above summarizes the findings. Closer to retirement, actual budget expenses can be factored into the math. Other variables that can impact an individual number include your desired retirement lifestyle, inflation, investment risks during retirement, legacy plans, as well as the client's expected longevity.

I offer prospective clients a free, simplified projection during my consultation.  This advice is based on the basic information provided.  It's a good starting point, but working together to build a more complete financial picture is the only way to truly plan out something as important your financial goals.

Why You Need to Know

Aside from client specific factors, there are two other trends we have to work into retirement planning – Social Security and medical expenses.  Social Security is in trouble, though it is estimated that the fund will able to cover 75% of the benefits by 2035.  Medical expenses are yet another factor that needs to be consider.

As of 2015, a couple beginning retirement needs at least $245,000 at the start of retirement to cover these costs.  Health care costs have a long term inflation rate of 5.41%. With that in mind, I’m going to go present two hypothetical cases studies that can help you get an idea of how retirement savings are calculated.

Retirement Case Study 1

The Strummer Household

Joe and his wife are both 30 years old.  Between the two of them, they have an annual income around $75,000.  Both of them have parents and grandparents that had long lives.  With that in mind, they’re both planning on delaying retirement until they’re 70.  That means we’re looking at retirement in 2056.  The couple doesn’t plan to have children, so their main concern is not outliving their money.  They want to make sure they both have enough to live comfortably until age 100.

They’re have a long time until retirement, and their tolerance for risk is high.  They’d like a moderately aggressive investment account.   A moderately aggressive allocation is typically set at 70% equity and 30% fixed income, with a historic rate of return (from 1/1978 – 12/2012) of 11.39%.  There is no guarantee that we’ll see that rate of return in the future, and we need to factor in inflation. I’ll assume a conservative 8% investment return with inflation at 3%.  This gives the client an inflation adjusted rate of return at 4.85%.

So now I have a reasonable, if not conservative, investment rate of return.  My next step is to figure out what their income needs are.  Based on the retirement replacement income ratio study, the couple will need 77% of their current income, which is $57,750. Using the Social Security Administrations online calculator, we can estimate that they can expect $2,865 monthly (in today’s dollars), or $34,380 annually.  If Social Security Administration is reduced to 75% of the payout, they may only receive $25,785 a year.

The Results

That means that the Strummers need to have at least $31,965 (in today’s dollars) for each year of their 30 year long retirement in order to cover the shortfall from Social security.  At this point, the clients and I would have a discussion about their faith in Social Security’s solvency.  We can either run the numbers with or without Social Security factored into future income.  In this example, I decided to include Social Security.

The client’s target income from their retirement savings is $31,965 in today’s dollars spread over the next 30 years. With inflation factored in… that means my clients will need $104,271 for the first year alone!! That’s just for the first year!

To make matters more complicated, the Strummers investment returns are expected to drop in retirement due to the fact that they can’t afford to take the same risks they took when younger.  A conservative investment portfolio has historically seen an 8.67% rate of return (from 1/1978 – 12/2012). I’ll assume a far more conservative 6% rate of return, which then provides an inflation adjusted return of 2.91% going forward.

Let’s begun crunching the numbers.  The first year payment needs to be $104,271 at the beginning of the year.  The clients will need 30 annual payments that factor in investment growth and inflation.  The clients assume that the account will be completely drawn down at the end of life.  When I run the numbers, I show that the clients will need $2,127,911!  But wait… we also have to factor in medical expenses.  The $245,000 predicted becomes $2,015,759 if the health care inflation rate holds steady.

This client needs $4,143,670

Retirement Case Study 2

The Jones Household

Mick is only a few years away from retirement.  He’s 58 and single, with plans to retire at age 62.  This means that he’ll be calling it quits in 2020.  His family health has been mixed, so he’s not as concerned with longevity.  Since he has no family, he plans on bequeathing whatever’s left over to the Humane Society.  Mick is near the end of his working years, which means he has a fairly high salary of $133,000 a year.

Mick has already cut his investment risk down to where he plans on keeping it throughout retirement.  We agree that we’ll set his projected inflation adjusted rate of return at 2.91%.  Since Mick is close to his goal, we have a good idea what his budget needs will be though retirement.  Already, his car and home are paid off.  Mick wants to finally travel the world upon retirement, so we’ll have to factor that additional cost.  After reviewing all of Mick’s financial information, we come to the conclusion that he’ll be more than comfortable living on $75,000 a year.

That’s an inflation adjusted $84,413 at the start of retirement.  Since Mick is retiring early, he’ll have a reduced Social Security benefit, which will provide $25,704 annually starting in 2020.  Mick will need start taking $58,709 from his account when he retires.  This means that he needs to have $1,062,686 set aside in addition to the $302,477 for medical expenses.

This client needs $1,365,163

Work with an Expert

Your first step is to find out what how much you need for retirement. Once you know, you can focus on creating a budget that allows you to save.  Feel free to reach out for a financial consultation to get an idea of what your goal should be.

Keep in mind that it would be an estimate to start with.  Building a financial plan is not simple matter.  Once a strategy is created, you'll want to work with a professional to implement the plan and monitor your progress.  Partnering with a financial expert is about the peace of mind you have in not worrying about tomorrow.