How Much Do You Really Need To Pay For Retirement

How Much Do You Really Need To Pay For Retirement

Many leading professional financial advisors suggest you need $1 million dollars or more in savings to live comfortably in retirement. However, the reality is couples between the ages of 55 and 65 onlyhave median 401K balances of $111,000. The average household savings for the same age group is less than $150,000. This leaves a huge gap between what you have set aside for retirement and what you need to live independently.

No one knows how long you will live, what your health care costs will be, and how things will work themselves out. However, if you do not take the time to consider your current financial position and take steps to prepare, it will be difficult to enjoy any level of security when retirement rolls around.

How Much Income Do You Need To Replace?

The first thing in deciding your personal funding requirements is to come up with a ballpark estimate of how much money you will need each month to live on. Professional advisors suggest using 75%, 80% or even 100% of your current income as a metric depending on the advisor with whom you work. Consider the folowing: What expenses will be eliminated when you are no longer working? Costs of commuting, work lunches, professional attire, and so forth. Then add back new costs which may include higher insurance premiums, hobbies or travel expenses. Now add savings. You may have more time allowing you to cook at home more, finding discounts and other strategies to reduce living costs.

Don’t forget to include debt payments like a mortgage (or housing costs), credit cards, student loans, or car payments. Lastly, add in expensessuch as taxes and insurance payments, annual trips or other intermittent costs. From here you can tabulate an estimated retirement budget.

What Income Streams Do You Have?

Start with the social security website and calculate estimated social security payments based on when you might begin receiving benefits. This can be found at If you will be receiving a pension from a current or previous employer, contact human resources and gather information on anticipated income and what your options are available with regard to distributions.

Do you have any other income streams such as annuities, royalties, rental income, or other funds that will come in consistently?

Now, take the amount you need each month and subtract it from the total income streams available. This figure is the amount you need to cover through investment savings in order to have the retirement you want.

Formulas for Calculating Investment Savings Needs

There are three basic calculations used to determine how much you need to have invested to your retirement. Based on life expectancy tables you can anticipate living around 20 years in retirement, if you are what they call, average. That also means you might have 30 or more years to fund if you are healthy and have good genes.

The 4% Rule provides a simple calculation. The first year of retirement you withdraw 4% of savings and then adjust for inflation each following year. Based on these calculations you can anticipate having your investments last for your lifetime (30 years). It assumes you are investing in a mix of stocks and bonds and that the market experiences normal fluctuations.

Based on the 4% rule you need $100,000 invested for every $400 a month you need in income. So, if your gap is $25,000 per year, then you need around $600,000 invested to cover your anticipated living costs.

8 Times your final salary is another common method for determining how much money you need to save. Simply take your final salary and multiply it by 8. Based on this calculation, if you make $100,000 a year then you will need $800,000 invested to cover the costs of living in retirement.

Income streams calculations are another way to determine savings goals. This method considers social security, pensions, annuities and other income streams as compared to income requirements. You subtract that from your annual income goal and then multiply that result by 25. Let’s say you determine you need $75,000 in retirement to live comfortably. If you receive $48,000 in social security and pension payments for you and your spouse, this leaves a gap of $27,000 per year. Multiply that by 25 and you need $675,000 in retirement funds.

Filling the Gap

If you are like most Americans there is a hole between how much you have and how much you need that requires attention. Depending on how many years you have left there are three basic strategies. You can work longer, save more or lower costs. Utilizing a combination of these three strategies will provide the most effective results.

Work Longer. Pushing back retirement age will give you time to increase balances and reduce costs before needing to access those funds. Moving to part time employment will also reduce dependence on savings and lower the amount you need because the number of years in retirement will shrink.

Save More. As children leave the nest and graduate from college you may be in a position to up your savings rate. Increasing retirement contributions to 20% or even 25% of your income adds up quickly. If you earn $100,000 annually and set aside 25%, you add $25,000 per year to investment accounts. It only takes four years to increase savings by $100,000. Let compound interest work for a decade or more and you can reach you goals faster than expected.

Lower Costs. This can be accomplished by a decrease in spending and reducing debt. To decrease spending you might consider moving to a smaller home or a location with a lower cost of living. Eliminating discretionary spending, clipping coupons and other methods of saving can trim 10% to 30% from your existing budget.

Reducing debt will relieve stress and enable you to live on less in retirement. This step can significantly reduce savings requirements. For example, eliminating $50,000 in credit card debt will reduce monthly expenses by up to $1,500 per month. That adds up to $18,000 per year in lower income needs. Using the 4% rule, reducing income by $18,000 per year can reduce savings requirements by around $375,000. ($100,000 = $400 in monthly income. $1,500/400 = 3.75). Debt reduction has the ability to shrink investment savings requirements to a much more attainable figure.


How much you really need for retirement is as personal as the number of seniors retiring. Lack of planning can leave your retirement on life support, while planning, even if you are starting late, can have big rewards.

Retirement does not need to be a looming event that you are dreading because of lack of preparation. Take the time to determine how much you really need and then put a plan in place to get there. A great retirement is waiting.