How to figure out how much money you need to retire comfortably

Most Americans have no clue how much money they need in order to be comfortable in retirement. Experts say, "It is important to calculate as early as possible."


Many Americans, 56%, have no clue how much money they need stashed away to fund a comfortable retirement, according to a Northwestern Mutual survey released in June.

"It is important to calculate as early as possible. It requires time to build and is difficult to make up," says Guy Hockerman, director of financial planning at the Commerce Trust Company in Missouri.

So how much money will you need to retire comfortably? Grow crunched the numbers to find out.

Generally, experts say, the rule of thumb is that you should aim to have an annual income in retirement that's equivalent to about 75% of your pre-retirement income. That includes both money that you have already saved and what you expect to receive from your Social Security benefits. We used the Social Security Administration's benefits calculator to estimate that part of the payout and then calculated the balance you'd need at retirement to cover the rest, assuming a withdrawal rate of 4% (meaning that you withdraw 4% of that balance each year).

Based on those calculations, a 66-year-old earning $50,000 and retiring this year would need about $523,500 saved.

The further away you are from retiring, the more money it is likely that you'll need.

Say you're a 25-year-old making a salary of $50,000 a year, which is pretty consistent with what recent grads can expect to earn. The Social Security Administration's benefits calculator estimates that, by age 67, you'd be earning $220,000. (That factors in some of both inflation and raises.) The calculation assumes your annual income increases by a bit more than 2% per year early in your career, with wage growth slowing down as you approach retirement. That would put your retirement savings goal at about $1.6 million.

These calculations are personal, though, and a lot depends on the cost of living where you are, as well as your life plans, including whether you have a partner or you'll be flying solo in the long term, your potential expenses in retirement, and even how long you expect to live. Because the calculus can get complicated, it's worth talking this through with a certified financial planner or another advisor.

For example, if you have annuities, pensions, or rental income, then you won't need to put away as much in order to live comfortably. Same goes if you're investing using a Roth account: Roth contributions have already been taxed and aren't taxed on withdrawal, meaning your balance goes further in retirement. Factors like where you live, whether you retire with any debt, and what kind of retirement lifestyle you envision, can also make a difference to your goal.

Fidelity estimates that if you're a 25-year-old planning to retire at age 67, you'll need 10 times your annual salary in savings for a secure retirement. But it suggests you need eight times your salary with "below average" retirement spending, and 12 times your salary for "above average" retirement spending.

All the same, here are four steps you can take to get, and stay, on track.

Start saving for retirement as soon as possible

The best time to start saving for retirement is as soon as you start earning. When folks well into their careers dramatically increase their retirement savings, it can often be painful since it means less take-home pay. But if you're a recent grad, you can start stashing that money away before the lifestyle creep has a chance to set in.

And, thanks to the power of compounding, that money can then work for you by growing over the course of your entire career.

"Millionaires are made in their 20s and 30s, not their 50s and 60s. The reason being, they have decades of compounding growth," says Fred Creutzer, president of Creutzer Financial Services in Maryland. Time is on your side, and it's a powerful force.

Don't miss out on your company's 401(k) match

Even if you can't save the 10%-15% percent of what you earn each year for retirement, as Fidelity recommends, if you have a 401(k), you should at least put in enough to receive whatever match you can. It's basically free money: You can get an immediate 100% return on your contribution if you take advantage of a dollar-for-dollar company 401(k) match.

The employer match also counts towards your total, so if you save 4% and your company matches 4%, you're already at 8%.

Is retiring early actually a good idea?

Video by Stephen Parkhurst

Pay down your debts

While paying off your loans won't increase the size of your savings, it does mean lower regular debt payments, and that could potentially mean you need less stashed away for retirement. Paying off loans more quickly usually also means you pay less, total, in interest.

"It is very hard to pay off a mortgage in retirement. And there are some people nearing retirement who are still paying off school loans, too," says Jay Srivatsa, CEO of Future Wealth in California. So, to the degree possible, it's useful to prioritize becoming debt-free as soon as you can.

For inspiration, here are strategies several ordinary people have used to pay tens of thousands of dollars in debt quickly.

Work for a few years longer if you can

If you're nearing retirement and don't have enough saved up, you may want to consider working a few more years. This gives you more time to save and it could increase the size of your Social Security payment. It also means you will need to have less saved up in total, since that money will need to stretch over fewer years.

But remember that this isn't a bulletproof plan. Between surprise declines in health and age discrimination, not everyone chooses when they quit working for good. So the smartest thing you can do is to be prepared, no matter when you hope, or plan, to be able to retire.

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