Tina Hurley Senior Vice President | Head of Advice, Planning and Product | Citizens
As a strategic partner who helps clients navigate and grow in changing circ*mstances, Tina is responsible for the direct management of the Wealth Management Product Team, including the investment platform and a team of Certified Financial Planners serving all segments of net worth.
Key takeaways
- There is no one-size-fits-all plan when it comes to how much you'll need to retire, but there are a few common benchmarks.
- Some strategies call for having 10 to 12 times your final working year's salary or specific multiples of your annual income that increase as you age.
- Consider when you want to retire, goals, annual salary, expected annual raises, inflation, investment portfolio performance and potential healthcare expenses.
Most people look forward to their retirement, dreaming of a lifestyle in which they have the freedom to spend their days as they wish and answer to no one. But how much do you need to retire? Deciding when to do it requires a careful evaluation of your current salary, investments, expected retirement lifestyle and other factors.
Common ways to gauge retirement saving
Everyone has different needs, wants and goals for retirement, so there isn't a one-size-fits-all plan that will work in any scenario. Thankfully, financial professionals have created a few guidelines that have varying pros and cons but at least give more insight than "save as much as you can." These can help you answer the question, "How much do you need to retire?"
- The final multiple — 10 to 12 times your annual income at retirement age. If you plan to retire at 67, for instance, and your income is $150,000 per year, then you should have between $1.5 and $1.8 million set aside for retirement. A multiple of your final working year's income is appealing to use as a guidepost, because it's easy to calculate, especially the closer you are to retirement when your final annual compensation is easy to estimate.
- The pacing angle — a multiple of your annual income at your current age. At age 30, some financial professionals suggest accumulating the equivalent of your current annual income. By age 40, you should have accumulated three times your current income for retirement. By retirement age, it should be 10 to 12 times your income at that time to be reasonably confident that you'll have enough funds.
- Seamless transition — roughly 80% of your pre-retirement income. This amount is based on a safe withdrawal rate (SWR) of about 4% of your retirement accounts each year. The SWR is the amount you can withdraw from your retirement accounts annually to ensure you will have retirement income for approximately 25 years.
- Join the club — $1 million to $1.5 million. Although $1 million doesn't go as far as it once did, having a net worth above $1 million still puts you in the upper percentage of Americans in terms of net worth. When combined with Social Security, it can help you have sufficient savings to draw from to meet your financial needs in retirement.
Following any of these suggestions can help you plan for the future, but they also oversimplify the calculation because there are so many factors, such as your unique retirement vision, which can affect your estimation.
Factors that affect how much you'll need to retire
You will need to evaluate multiple different factors when estimating your income needs in retirement. Here are some things to consider that will help you answer the question, "How much do you need to retire?"
When do you want to retire?
If you know the age you want to retire, it will help you know how much longer you have to grow your savings. If you plan on retiring early, you'll need more savings to cover the years you aren't working than if you had retired later.
How much do you want to spend in retirement?
It's important to determine your post-retirement spending based on your expected lifestyle. What will you do in retirement? For example, traveling the world would likely cost more than spending most of your time with your grandchildren. Some people retire from their primary careers and then embark on post-retirement careers to supplement their incomes.
What's your salary and what's your expected return on investments?
This will help you determine whether you are on track to meet your retirement savings goals or if you need to increase your contributions or make adjustments to your investments. For your remaining working years, you'll need to estimate your annual salary, expected average annual raises, inflation rates, investment portfolio performance and other factors.
How much are you comfortable pulling from retirement funds?
How much you withdraw from your retirement accounts each year will determine how long your savings will last. Many financial experts recommend a 4% savings withdrawal rate per year to ensure you have enough to last throughout your retirement years. While 4% may a be widely accepted approach, it’s best to determine your withdrawal rate with your financial advisor.
Other factors
Due to the rising costs of health care and long-term care, you should also consider your anticipated health when you retire. According to the Employee Benefit Research Institute, retired couples can expect to need anywhere between $184,000 to $383,000 in savings to be able to mostly cover their medical expenses, depending on their Medicare coverage level. This amount is likely to increase over time. It's also important to consider the status of Social Security since many people use their expected income from Social Security as a starting point for creating a retirement budget.
Using an online retirement calculator
Depending on how these variables look in your situation, it might mean the guidelines won't work for you. But in addition to consulting with financial professionals, you can use an online retirement planning calculator to get a reasonable idea of whether you are on track to be where you want to be.
Retirement calculators can help you answer how much you'll need to defer for retirement, given how much you currently have accumulated, how much you earn, when you would like to retire and even how much you think you'll spend, given your post-work lifestyle. They give you the flexibility to create scenarios, so you can set realistic expectations. Here are two scenarios to help illustrate how they work:
Scenario 1
Monica, age 40, aims to retire at 62 and currently earns a salary of $125,000 per year, of which she consistently sets 15% aside for retirement. As a result of planning for retirement since she began working, she has accumulated $450,000. She estimates she will spend 90% of her final working year's salary while retired.
Using assumptions about average annual raises (2%), investment performance before and after retirement (7% and 4%, respectively), inflation (2%) and retirement length (25 years), our retirement calculator estimates that Monica could retire at 62, and at age 87, she will still have about $581,000 in retirement assets. That means she is likely to have a cushion for her 90s if she is fortunate enough to live that long.
Scenario 2
Steve is 30, earns $80,000 per year and has followed the suggestion of accumulating $80,000 for retirement to date. He has made similar assumptions as Monica, except he defers 10% per year for retirement, wants to retire at 65 and thinks he'll spend 100% of his final year's salary while retired
Unlike Monica, however, Steve's current salary and deferral rate take him to age 87 before he runs out of retirement assets. Since Steve is planning on a retirement length of 25 years, taking him to 90, he'll need to change his plan if he wants to get there with some funds left over.
These are for illustration purposes only and not representative of actual people or outcomes.
The bottom line
So how much money do you need to save for retirement? It's a question that requires a fair amount of introspection and analysis. You can use any of the common suggestions of income multipliers or percentages to guide you, but you'll likely feel you have more certainty if you ask yourself key questions about what you envision for retirement and then set clear goals. With a defined target, you'll know better what you'll need get you there.
When you're making plans for a lifetime, you should have someone you can turn to with questions and guidance. Click the button below to request a call from a Citizens Wealth Advisor who can help you feel made ready for retirement.
Request a call
