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How Much Money Do You Need to Retire?

Updated: Nov 4, 2023

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 your monthly Social Security payments will be lower.

If you aren’t able to save for retirement, you still have a safety net in Social Security. If you are able to save up little or nothing over your working years, you can rely solely on Social Security and its corollary Supplemental Security Income (SSI).

Investment type No. 1: Stocks Held in ETFs, Index Funds and Mutual Funds

The stock market traditionally returns about 8% over a decades-long investment period, so it’s a good way to earn a strong return. Stock market gains are not guaranteed, however, so you can’t count on that 8%.

Investment type No. 2: Roth IRA Brokers

If you are interested in starting or rolling over a Roth IRA or creating a backdoor Roth IRA or Roth conversion, check out our list of excellent Roth IRA brokers.

Monitor Your Retirement Savings

Once you’ve got your retirement plan set up, it’s important to keep an eye on how it’s doing. When you are invested in the stock market, the balances in your investment accounts fluctuate. When they go up, it feels great, but in a market downturn when you see your precious retirement funds drop by the thousands of dollars, it can be physically sickening.

If you are more risk averse and have much of your money in safer investments like Certificates of Deposits or high-yield savings accounts, your money makes so little that the slow growth can be depressing.

Regardless of where you are putting your retirement money, you have to force yourself to periodically reevaluate if that is the right place for it. If, for example, you have a portion of your 401(k) money invested in an ETF in the retail sector and that industry begins to have economic trouble, you may want to sell some of the shares in that account and consider buying shares in a different fund that your company 401(k) offers.

Your Actual Age and Your Retirement Age

You can use online calculators to explore possible retirement savings amounts, potential dates for retirement and how long your retirement money might last. You can see the average retirement savings ranges at different ages, but everybody’s situation is unique.

A divergence has emerged between high earners who aim to retire early (the Financial Independence, Retire Early or FIRE movement) and the majority of workers whose low retirement savings necessitate working far past the traditional retirement age of 62.

If you can delay taking Social Security and delay retiring until age 65, that lets you maximize the monthly amount and get to the age where you can use low-cost Medicare for health insurance. If you retire before age 65, you need to buy your own health insurance, which can be expensive.

The 4% Rule

There are different ways to determine how much money you need to save to get the retirement income you want. One easy-to-use formula is to divide your desired annual retirement income by 4%, which is known as the 4% rule.

Monthly Withdraw from Your Savings

Once you retire, you will probably want to supplement your Social Security with money from your retirement savings, either in a 401(k) or IRA. For example, if you have $250,000 in savings, you could withdraw $10,000 in the first year and adjust that amount upward for inflation each year for the next 30 years.

Enjoy Your Life

How long will you live? Because no one really knows the answer to that question, it’s best to look at averages. All you can do is your best, and the concern over your future financial security should not be cause for stress.

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