Do You REALLY Know How Much You Need for Retirement?

Do you know how much you really need for retirement?

Is it 8 times your ending salary? Is it 25 times your annual expenses at the age you’re leaving work for good? Or is it simply whatever saving 10% of your income for 40 years happens to be?

Determining a specific number for retirement is tricky. There are way to many variables in play here to make a single formula sensible for every person asking this crucial question.

But we have to come up with some sort of financial goal to aim for, a number we can hit that says, “okay, it’s reasonably safe to assume you can stop relying on a paycheck and start pulling from your nest egg now.”

Understanding how much you need for retirement is a process that may take you some time to work through. Don’t rely on a simplistic calculation to provide you with a realistic answer, or any online tools that simply ask your current age, when you want to retire, and what you’re making and saving now. Instead, consider all the factors in play for your specific situation, and how those may affect your retirement number.

Understanding What You Want Out of Your Retirement

Most formulas or calculators that show you how much you need for retirement present a problem because they go off a standard set of assumptions. They might assume you’ll retire at 67 (or, for Millennials, even into your 70s) or that you’re saving 10% of your income for the next 40 years. Or they’ll assume if you’re making $50,000 today, you’ll be spending every cent of $50,000 annually in retirement.

But what retirement looks like has changed. Your ideal retirement may be early retirement, a la Mr. Money Mustache. You might want to retire from a 9 to 5 office job in order to switch to pursuing other work you’re passionate about. You may want to move to a tropical location where your living expenses are half what they might be in the United States — or you might have a nice piece of land in the mountains that you want to use to get away from it all in retirement.

Knowing how much money you need starts with understanding what the retirement you want looks like.

From there, you can begin to estimate your annual expenses. Do your research to find the answer to the following types of questions:

• Where do I want to live?
• Will I have a paid-off residence or will I have a mortgage/rent payment?
• What will my fixed monthly expenses look like (think utilities, car payments, groceries, gas, etc)?
• What kind of purchases — beyond my bills — will I make on a regular basis?
• What kind of purchases will I want to make occasionally, and how will I budget for that?
• What do I want to do with my time (do you want to do part-time work, immerse yourself in a hobby, or travel)? How much money will spending my time this way likely cost me?
• How will I account for the realities of getting older, like increased medical expenses and end-of-life care?
• Will I have any ability to make extra income if I absolutely have to? How will I do this?
• What will my tax obligations look like?

Yes, these are tough questions to know the answers to. Try to estimate high on your expenses and low on your income to get a “safe” number, and remember — these are supposed to be educated guesses. Again, do your research. Ask questions. And don’t forget to consider inflation.

Once you have an idea of your annual expenses, consider how long your income will need to be covered by your retirement savings. Want to retire at 60 and estimate your annual expenses to average $45,000? You’d likely need around $1.3 million in retirement savings (because I’m being positive here and want you to live a long healthy life into your 90s).

Of course, this assumes that your money will stop earning returns the moment you start withdrawing from your nest egg, which is obviously not realistic. But it’s also not realistic to say, even with all the planning on the world, that you won’t have a year in retirement when you spend more than your average $45,000.

And remember, there are many different ways to actually reach this number. If you save 10% of your income for 40 years, that might be one way. Or you could start saving in your 20s, save 50% of your income, and hit your magical $1.3 million much sooner than 60 — though the years your nest egg now has to last, if you start drawing off of it sooner, have increased.

As you can see, there are countless different ways to consider your numbers and tweak them accordingly. Do just this! Play around and run different scenarios to see how the numbers change as you modify spending and saving habits.

How Much You Need for Retirement Depends on Your Income Sources

For Gen X and Gen Y — or those in their 20s, 30s, and 40s — retirement is likely going to look much different in the future. Not only are we living longer, but we also have a different understanding of our careers and work.

Our generations were not incentivized to work 40 years with a single company. There are no pensions waiting for us as a reward for company loyalty. Instead, we’re more interested in finding work that’s meaningful (and this is especially true for Millennials). We have no problem moving from business to business to find a more fulfilling career and after seeing massive layoffs during the Great Recession, we’re less likely to assume our companies will take care of us through good times and bad.

Gen X and Gen Y are also full of entrepreneurs and nontraditional workers (think independent contractors and freelancers) who have succeeded in making their passion into paying work.

All this adds up to two generations who are unlikely to work work work as employees of a single company before retiring to do nothing but rock on the front porch all day.

We’re more likely to continue making some sort of income during our retirement years, via part-time work, hobbies that we’ve monetized, or businesses that we still own but have outsourced the labor on.

Having a separate source of income — even if it’s just a little money each money — drastically changes the number you must have saved up for retirement since you’re not relying 100% on your nest egg to cover all your expenses and spending.

And of course, if you are one of the lucky individuals who still has access to a pension, then that will change your numbers as well.

Calculations to Try (If You Just Need that Hard Number Handed to You)

Of course, coming up with a precise number on your own is difficult. It’s a lot of research, number-crunching, and scenario-running. The good news is there are some calculations that you can use to ballpark how much you need for retirement that take a tremendous range of factors into consideration.

Track All Your Accounts With Personal Capital

Personal Capital lets you see all of your accounts in one convenient place.  Sign up now for free.

Try these calculators and see how inputting different values for different variables affects your outcomes:

• FIRECalc
• Ultimate Retirement Calculator (from Financial Mentor)
• Flexible Retirement Calculator