You’ve likely heard someone say that you need to have a certain number of dollars saved to retire. You may have even played around with a retirement calculator tool. But how much money do you need to retire? Well, the quick answer would be as much as you can save, but there is a lot more to consider than that! 

“Any educator, financial advisor, or friend that tells you that you need a certain amount of dollars to retire is not truly preparing you for retirement,” warns Dr. Thia, MPower CO’s Director of Education and author of Richer Retirement. “If you have the luxury to retire when you choose, and only 40% of us will have that luxury, no calculator or other individual can choose for you how you want your retirement to look. Therefore, telling you how much money you need to retire is artificial. A million dollars doesn’t buy what it used to.”

First of all, be dubious about retirement financial calculators that are readily available from a variety of sources.  You tend to plug in a few numbers, guess at your rate of return and the inflation rates of the future, and then get how much money you need to retire. 

In fact, Professors at Texas Tech University did a study of a number of these calculators and concluded two things:

  1. They give a wildly wide variety of “answers” even when the data going in is the same. 
  2. The study pointed out that the assumptions within the calculators varied a great deal and also that the assumptions built-in were not transparent.

Their bottom line was that they did not find any retirement calculator in their study that they could recommend. Therefore, there are no retirement calculators that MPower Co recommends. 

Retirement Planning is part a numbers game and part a heart (or maybe chess) game. Read more to understand why the amount of money needed to retire is a complicated matter and the considerations that need to go into figuring out what your financial retirement goal is.

Financial Rules of Thumb on How Much Money is Needed to Retire

Lump Sum Rules of Thumb

There are sources that say retirees need a nest egg of $1, $3, or $4 million dollars to retire. These are arbitrary numbers derived from formulas based on averages. 

Percentage of Current Spending Rules of Thumb

According to the Department of Labor and a joint report they did with the CERTIFIED FINANCIAL PLANNER(TM) Board, individuals need 80% of their take-home pay in retirement. 

So, if you take-home $100,000 now, in retirement you need to have $80,000 of take-home income a year. 

AARP suggests the percentage is a bit lower – between 70-80%. 

While they may be helpful as a starting place, they are no substitute for customized retirement planning and they aren’t the ultimate answer for people.  Why?  Research about retirement spending suggests that it is not at all consistent from year to year.  Think about your spending in retirement in the shape of a smile.  The early and late years of retirement are often the most expensive.

womens hands and a lake

5 Things to consider when determining how much money you need to retire

1. The amount of money you need in your first year of retirement, second year of retirement, fifth year of retirement, etc. is not the same amount. 

You may need 100% of your working year’s income or even more during the early years of retirement.  Young retirees may have a list of deferred projects around the home, like replacing flooring, finishing the basement or getting that thirty-year old deck replaced.  Have you priced good quality replacement windows lately?  

In addition, those retiring before age 65 when they will be eligible for Medicare health insurance, may find the cost of health insurance to be shocking. 

Spending in retirement tends to go down about 1% a year as retirement progresses into the slower-go years in people’s 70’s and early 80’s.  Why do costs tend to increase again late in life?  You know it.  The cost of healthcare. With the likelihood of increasing health issues drives living costs up.

2. Think about the big picture of expenses, not just the day-to-day expenses. 

People tend to think mainly about monthly living expenses when they plan – like cell phone costs, food, electricity, homeowner’s association fees, and insurance.  The more infrequent costs occur, the more likely people are to miss including them in financial needs – starting with yearly property taxes and holiday gifts to replacing vehicles or a roof about every 20 years. Big, infrequent expenses can really make a financial dent. 

3. How do you want to spend your retirement years? 

How we spend our weekend time during our working years is indicative of how we spend our time in retirement. Do you envision sitting at home during your retirement years watching tv or relaxing on your outdoor patio? Or do you see yourself going more (this doesn’t have to mean spending more, but likely does). 

Young retirees may have a travel bucket list and may be thinking they will never have more energy or better health to travel than at the start of their retirement. There is a reason early retirement years are often called the “go-go years.”  

 If you want to do more during your retirement years because you have more time, it likely means cutting back on the amount of cash flow you have is unrealistic. 

4. Do you want to use up your wealth by the time you pass or do you want to pass wealth to your heirs?

Your answer to this question changes the amount of money you need to retire.

Say you have $1 million dollars the day you retire. Each year you need $40,000 of income to live from the account. If your retirement is 30 years, you’ll have the money used up before the end of the 30 years. That is, if you aren’t able to live on other sources of income (i.e. pension funds, Social Security, income from a part-time job).

So, if it is your goal to live comfortably and pass a significant nest egg on to heirs, you  will need to figure that into the amount of money needed for retirement.

5. Taxes

Not all accounts are created equal when it comes to how they are taxed in retirement. Traditional IRA withdrawals are taxed during retirement but Roth IRA withdrawals are typically not taxed during retirement.

If you have income in a year, it can affect the tax on Social Security benefits. 

If money saved for retirement is in taxable accounts at retirement, consideration needs to be made to account for the tax liability created by accessing the funds.

What makes retirement possible? 

All of the things above make it seem like retirement might not even be possible.  It sounds like we might as all work forever and forget about retirement, and Dr. Thia warns in her retirement course Richer Retirement that the saying is expect less from others and save more on your own to be prepared financially for retirement. However, it’s not all gloom and doom.

What makes it possible to save significant amounts of money to live a good retirement? Compound interest.

Let’s give an example to demonstrate how compound interest can make a difference: if a 25-year-old puts $6,000 (the current limit for an IRA) into a retirement account each year. Each year that retirement account earns 8% (the historical market rate) for 35 years, they would have over $1.1 the day they retire. They have that much not only because of what they invest, but because time allows the interest to compound.

You may be thinking I’m way past the age of 25, so there isn’t hope. Let me assure you there are positive things working for you. If you are older than 50, you can contribute an additional $1,000 for retirement each year in IRAs, so a $7,000 IRA limit exists for you (as of 2020). If you start now, each year increase the amount you save as limits increase, take advantage of an employer match in a 401(k) or 403(b) plan, you can make strides towards your retirement. 

This example is based on being invested in the market. Interest rates on bonds and debt instruments are so low that they don’t maintain spending power. That is why at MPower Co, our focus is on starting to save for retirement now, investing it appropriately, and not letting that boat capsize (i.e. taking money out of the market for unnecessary purposes). 

Save as much for retirement as you can, and find peace that you are doing the best you can to better your retirement years. 

Woman in flowers smiling

Retirement Is More than Money

Ok, so now that you’re encouraged on your way to being financially prepared for retirement, there is another wrench to throw into the picture. Have you thought about how you are going to mentally transition from your working years to retirement? 

We work for a significant number of years, have a certain routine, and then all of a sudden, whether it’s in our timing or not (remember the majority of us don’t get to choose when we retire), our routines are changed, our relationships with family members or old coworkers change. 

Dr. Thia has been a retirement coach to many people over the years. When she talks with people about retirement, it’s usually not money that is the first people have an issue with. In her experience people either are too busy or not busy enough.  For her, those that do the best in retirement often start conversations with her explaining how they don’t know how they ever found the time to go to work. The saddest conversations she has are when clients flatly explain they don’t know how to spend their time or others are spending their time for them. 

We need to not only be the CEO of our finances in life and retirement, but we also need to be the CEO of our time. Many of us are excited about not setting an alarm clock in retirement. Research suggests that the second greatest use of time, after time spent sleeping, in retirement is passively watching TV.  

That should be enough for you to jump up and get busy planning for other uses of time in retirement.  The research in positive psychology gives us powerful clues for how to nurture optimism, contentment, purpose and meaning that can make retirement our best years.

Being prepared mentally for the transition to retirement is critical, but practicing ahead of time and implementing practices in positive psychology now can give you a smooth transition into retirement. 

Dr. Thia is a pioneer in combining positive psychology with personal finance. “Get excited about what you are retiring to.  Start living now, when you can, the way you would like to live in retirement.  Learn how you like to travel now.  Learn how to garden, woodwork, or play golf… now.  Think you’d like to quilt in retirement.  Start now and get a circle of friends in place that will go with you right into retirement.”  

Richer Retirement

If you found this post to be helpful in preparing for retirement, think of how taking a retirement course online will excel you towards your richest retirement. Our online course Richer Retirement is about providing financial education with a positive psychology twist, so that you are prepared for a well-rounded retirement experience. 

Follow us on Facebook at MPower Finance or on Instagram at MPower Finance to get updates on our course offerings so that you can be in our next section of Richer Retirement.