Saving for Retirement: How Much Is Enough?

Dear Carrie,

I keep hearing that you need a $1 million or more to retire these days. I'm saving, but those numbers are pretty discouraging. Does it really take that much?

—A Reader

Dear Reader,

I agree that while it's easy for financial planners to toss out big numbers—$1 million, $2 million, maybe more—for a comfortable retirement, the reality for a lot of people will be a lot less. Of course, I encourage everyone to go for the goal and save as much as they can, beginning at an early age. But the good news is that, like so much in financial planning, how much you need for a comfortable retirement depends on a lot of personal factors.

For instance, do you envision an early retirement or will you put it off as long as you can? Do you want a quiet life in a less costly part of the country or do you plan to maintain an expensive home and travel the world? Will you completely stop working or continue on part-time? Will you stay in your home or downsize?

There are a lot of variables to consider—and a few unknowns—so you may not have exact answers now. But it's well worth your effort to think about these things in advance so that you can come up with a realistic retirement savings goal.

Start by estimating your yearly retirement expenses

You probably think you'll spend less in retirement. Once again it depends on you. A lot of people find that expenses are higher in the early years when they're more active, and gradually taper off as they get older. National statistics show that retired people spend about 80% of what working households spend, mostly on home- and health-related costs. But instead of relying on statistics, I'd do a sample budget.

Begin with what you currently spend yearly both on necessities and nice-to-haves. What will change? Work-related costs may go down. Your mortgage may be lower. Hopefully, you'll eliminate unnecessary debt. But while those expenses may decrease, others are likely to increase—for fun things such as entertainment and travel, as well as less appealing necessities such as health care and property taxes.

From my perspective, I think it's wise to assume you'll spend about the same in retirement as you're spending now. You may end up spending less, but it's a safe starting point for the sake of planning.

Calculate the total amount you need to save

Most people don't—and can't—live on savings alone. However, your savings will most likely play a big part in your retirement income. To figure out your savings goal, first add up all the annual income you can rely on except your savings. That would include Social Security, a pension, a trust, or money from real estate. Then subtract that amount from your estimated annual expenses. What's left is the amount of money you'll need from savings each year to fill in the gap.

Let's say you spend $90,000 a year and expect to have $50,000 in annual income from Social Security and rental property. That leaves a $40,000 annual shortfall that will have to come from your savings. Here's where the big numbers come in. Because in order to be confident that your money will last through a 30-year retirement, financial experts suggest you need a portfolio roughly 25 times your first year's withdrawal: $40,000 times 25 equals $1 million.

It's only a rule of thumb—and you personally may need less or have a shorter retirement—but if nothing else, this might be a wake-up call. So now what do you do?

Figure out how much more you should save annually

Add up all your savings in all your accounts. Then use a retirement savings calculator (there are a lot of them online) to get an idea of how much more you need to save each year between now and retirement to reach your total goal.

Working from the previous example, if you currently have $500,000 saved and you hope to retire in 10 years with a $1 million portfolio, you'd need to save an additional $15,000 a year and get an annual 5% net return. (Keep in mind that your actual results will vary, and may be more or less than that.)

Granted, that's just one scenario. You may need to save less—or more. But the only way to find out is to do some realistic and specific planning. Explore different scenarios with an online retirement planner or, better yet, meet with a financial advisor for at least a one-time retirement consultation.

If you eliminate the guesswork, you may also eliminate some of the worry. According to the Employee Benefit Research Institute, in 2013 only 46% of people reported trying to calculate how much they need to save each year for a comfortable retirement. Make sure you're one of them.

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