Financial Fundamentals Blog

How Much Do I Need to Save To Retire? (+ Calculator)

A person sitting at their desk calculating their expenses


For many individuals and households, the ultimate financial goal is saving for retirement and achieving financial security by building net worth throughout your working years.


But when planning out your finances years and decades into the future, it’s difficult to account for every variable you might face. From medical costs to inflation to the performance of your investments, pinning down the magic dollar amount you need to retire can be tricky.


Even with a lack of clarity about your future needs, though, there’s still plenty you can do to plan for a properly funded retirement. Here’s a look at how to approach retirement saving along with a calculator to help you gauge your future income needs.


Know the 80% rule.

Rather than figuring out the dollar amount you need for your retirement, it’s most important to understand the amount of annual income you need to fund your ideal retirement.


A popular rule of thumb is the 80% rule. According to this rule, you should expect to spend in retirement about 80% of what you spend during your working years.


Bear in mind that this rule has certain limitations. It assumes, for example, that you will maintain the same standard of living in retirement and that you won’t experience new living expenses, such as in-home care or increased medical costs. Despite its broad approach, the 80% rule can still give you a general idea of how much monthly income you might need after you retire.


Identify different sources of retirement income.

Once you have a general sense of the amount of income you’ll need during retirement, you can evaluate the sources of income you’ll be depending on in your golden years.


Retirement savings are a key source of income, but other sources of income are important. Social Security is one important source, and you can calculate exactly how much you’ll receive in monthly payments based on how much you’ve earned over your life and when you decide to start claiming Social Security benefits.


You might also have a pension, personal savings, valuable assets, spousal support, an inheritance or other potential sources of income that can be used to fund your retirement. Itemize these income sources and determine how much you can expect to receive from each of them. 


Bear in mind that while some sources—such as Social Security and a pension—can be accurately predicted, others are merely estimates.


Plan for income increases and inflation.

As you calculate your retirement income needs and your ability to save between now and your target retirement date, you’ll want to account for a few different factors that will affect your income and your income needs. These include:

  • Inflation: While the rate of inflation varies from year to year, most financial experts recommend planning around an assumption of an average 2% rise in inflation every year.

  • The rate of return on your investments: Different funds and investment managers have different forecasted rates of return. These rates can vary from one investment to the next, and while never guaranteed, historical performance can help you estimate what you might be able to generate in returns over time.

  • Your tax obligations and how investments will be managed to minimize your tax burden: Tax-optimized planning can make a big difference in your net annual income after taxes. A tax planner can help you leverage tax-free and tax-deferred investments alongside Social Security and other sources of income with a long-term goal of minimizing your taxes paid.

  • Your ability to increase savings as your income increases: As your income increases over time, will you be able to increase your savings contributions? This will affect your ability to fund your retirement and meet your target retirement date.

Retirement Calculator: How much income will you need?

For the purposes of determining your annual income needs, it’s helpful to start with an assumption that you will need 80% of whatever income you’re earning at retirement. 


If you plan on spending your retirement at a higher standard of living than what you’ve experienced during your working years — for example, if you plan on spending a lot more money on travel — then you may want to increase this estimate to around 100%.


Many retirement planning experts recommend that retirees plan on withdrawing roughly 4% of their retirement savings every year based on their annual income needs. This means that your annual investment withdrawals at the start of your retirement should not exceed 4% of whatever you’ve saved.


If you assume, for example, that your household is earning $125,000 in income at your time of retirement, 80% of this figure is $100,000, which represents your typical retirement income needs.


If we assume your Social Security and/or pension income will generate $25,000 in reliable income every year, this means your annual retirement withdrawals will equal $75,000. To make this withdrawal without exceeding 4% of your income, you would need $1.875 million in retirement savings to comfortably retire.


By using the above template and inserting your own income and expense numbers, you can calculate your own annual income needs and identify a target savings amount that will allow you to comfortably retire.


Start planning your retirement today with 7 17 Credit Union.

When it comes to building net worth and planning out your retirement, it’s well worth your time to consult experts and resources that can help you enter your golden years with certainty and stability. Your local credit union can offer the personnel and financial products you need to build toward a prosperous retirement. 


Ready to access these valued resources? Become a member. Open a checking account today.

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