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How Much Money Do You Need to Retire?

By Kathryn Hauer, CFP®

First published on June 17, 2021 by

No magic amount exists for the perfect retirement pot of gold; it varies depending on your needs. At some point in your life, however, it is likely that you will not want to or maybe even be able to earn money from a job. When you hit that age, you’ll thank your younger self for planning for that day. Take a look at how much money you need to retire now.

Define Your Retirement Goal

The amount of money you feel you need in retirement will determine how long you keep a job. You may consider easing out of the full-time job market as you age rather than completely retiring all at once.

A part-time job in your later years can bring healthful interaction with others, physical movement to ease aching bones, mental stimulation, a reason to get up in the morning and needed cash flow to supplement your Social Security and retirement savings.

Consider Your Expenses

Once you’ve completely retired, money from wages is no longer coming into your household each month. You probably will have Social Security income. You may be one of the rare people who have a pension that sends monthly dollars into your home for the rest of your life. Other income could come from your investments. These income streams, however, are not likely to increase wildly, so you are living on a fixed income.

Conversely, as your income narrows, your expenses may increase, especially if you run into health issues, which is more common as you age. A common gauge for retirement expenses is 80% of your current expenses. This estimate works well until medical issues or long-term care needs arise; then you might need more money.

Diversify Your Money

Diversification, or investing in many different kinds of investments instead of just one or a few, makes logical sense. You need to diversify your portfolio to protect yourself in the case of a market crash. Luckily, diversifying your portfolio isn’t as complicated as it sounds. Your company 401(k) will offer about 10 investment fund options that will help you invest in a diversified way.

Diversification is a little trickier in a self-directed IRA. You want to be sure you aren’t inadvertently undiversified. If you have some retirement money in mutual funds and some in Exchange Traded Funds (ETFs), you might think you are safe. But those 2 kinds of investments both involve buying into the stock or bond markets.

Retirement plan No. 1: A Traditional 401(k)

Your company’s traditional 401(k) is the best retirement plan you can use, if you have access to one, because it allows the greatest amount of tax deferrals. Most company 401(k)s offer target date funds, which are professionally managed funds with risk/reward levels considered to be reasonable for that duration of investing and that year for retirement. Any money you contribute reduces your taxable income for that year.

Retirement plan No. 2: A Roth 401(k) or IRA

Many companies now offer Roth 401(k)s. When you contribute to a Roth, you don’t get a tax deduction in the year you contribute. However, when you withdraw your money later in old age, none of your earnings are taxed.

Retirement plan No. 3: Your Small Business SEP

If you are self-employed or you own a small business, you could start your own company IRA or simplified employee pension (SEP) IRA. It’s like a regular IRA but with higher contribution limits and the ability for the company to use contributions as a tax deduction.

Retirement plan No. 4: Social Security

Life is hard, and catastrophes befall all of us over a lifetime. Women’s financial lives can be especially difficult, especially if they take years out of the workforce to care for children or elderly parents. Less wage-earning work means