How Much Money Do I Need to Retire?

How-Much-Money-Do-I-Need-to-Retire

It’s never too early to start planning and saving for your retirement years.

Explore this Guide:

What are your Retirement Plans?

Before you can figure out how much money you need for retirement, you first need to know what your retirement plans are.

There are a lot of things to think about when planning for retirement. You might want to move into a smaller, single-story home that will be less of a hassle to manage in your retirement years. You might have plans to travel or to get into your favorite hobbies. You might also have different plans about when you want to retire.

All of these retirement details are going to impact how much money you need for retirement so it’s a good idea to start thinking about them now.

Sit down and think about where you want to be financially when you retire. You probably want to be debt-free by the time you retire. Also consider how much money you need each month and each year now, and how much of that same money you might still need during your retirement years.

For example, right now you might be living comfortably on $500 a week, but that’s not considering your plans to be debt-free in retirement. So your income needs might be a little lower than they are now once you retire.

What’s Social Security?

Social Security is a federal government program. A portion of taxes gets put into a government trust fund. These Social Security funds are then available to people who have retired, have a disability that keeps them from working, or for dependents who have lost the support of a recently deceased loved one.

Basically, social security is part of where our taxes go and is meant as a security fund for those who really need it. As you pay taxes, you increase the credits you have toward receiving social security benefits one day when you retire.

What’s a 401k?

401ks are an employer-sponsored retirement plan. 401k plans are called “401ks” because they refer to an Internal Revenue Code.

401ks aren’t just retirement plans you can get from your employer; they are also a way to save for retirement that benefits your taxes each year. 401ks are great for taxes because the money you put into your 401k each year doesn’t get counted as taxable income you received. This means you’ll end up paying less in taxes and can possibly get higher tax returns.

401k plans allow you to pay a portion of your income to your retirement plan. That way you can start saving for retirement without having to put money aside yourself each month. Employers will often also match what you put aside in your 401k, which will help you save for retirement faster.

What’s an IRA?

An IRA is an Individual Retirement Account. An IRA is similar to a 401k but instead of being sponsored by your employer, IRAs are opened by an individual.

IRAs are also tax-deductible, meaning the funds you put into your IRA don’t count toward your taxable income when you do taxes each year. But this will also depend on what kind of IRA you have because there are several different kinds.

How Much Money Do I Need to Retire at 65?

To figure out how much you need for retirement at age 65 (or whatever age you wish to retire) you’ll want to consider how much you want to live on each month, inflation, taxes, and health care factors that could arise later in life. All of these variables will factor into how much money you need to save for retirement at 65 years old.

How much money you need for retirement will also depend a lot on how much money you currently make. For instance, the typical full-time worker in America made about $49,764 a year in the first quarter of 2020.

As an example, someone who makes $50,000 a year will generally want to have 80% of that $50,000 a year income as their yearly retirement income. That means someone who makes $50,000 a year now, will need about $40,000 a year in retirement.

Current Monthly Income x 0.80 (80%) = Suggested Monthly Income for Retirement

$5,000 x 0.80 = $4,000

If you want to retire at age 65 and want around 30 years of retirement money saved up, then you’ll need to work toward saving a total of $120,000 in order to still have $40,000 a year in your retirement.

Suggested Monthly Income for Retirement x 30 years = How Much Money You Need to Retire at 60

$4,000 x 30 = $120,000

How Much Money Do I Need to Retire at 60?

The sooner you want to retire the more you’ll need to save for retirement. So the only difference in your retirement savings calculations here will be for how long you’ll need retirement income.

For example, if you want to retire at age 60 then you’ll likely want retirement savings that can last you around 35 years. Let’s consider you’re the same person who makes $50,000 a year now, then you’ll do the following calculations to find out how much you need to save to retire at 60.

Suggested Monthly Income for Retirement x 35 years = How Much Money You Need to Retire at 60

$4,000 x 35 = $140,000

How Much Money Do I Need to Retire at 55?

If you want to retire even earlier, say age 55, then you’ll want to account for even more retirement years.

If you want to retire at age 55 and want around 40 years of retirement money saved up, then you’ll need to work toward saving a total of $160,000 in order to still have $40,000 a year in your retirement.

Suggested Monthly Income for Retirement x 40 years = How Much Money You Need to Retire at 55

$4,000 x 40 = $160,000

How Much Money Do I Need to Retire at 50?

Retiring at age 50 is very early. On average, people tend to retire at age 65. But if you do want to retire at 50 years old, then it’ll be a good idea to save at least 45 years of retirement savings.

Suggested Monthly Income for Retirement x 45 years = How Much Money You Need to Retire at 50

$4,000 x 45 = $180,000‬

How Much Money Do I Need to Retire at 40?

The earliest that most people want to retire is usually age 40. Retiring at age 40 might seem like the ultimate dream, and if you plan accordingly and save a lot now, it might work! The hard part of retiring so early is that you’ll need around 50 years of retirement money put away.

Suggested Monthly Income for Retirement x 50 years = How Much Money You Need to Retire at 40

$4,000 x 50 = $200,000‬

Just remember, simple calculations like this don’t account for things like down-scaling your living situation, not having monthly debt and loan payments anymore, the potential costs of healthcare in your old age, changes in the market, or inflation. To know exactly how much money you need for retirement consult a finance professional or use a retirement savings calculator.

How Much Money Do You Need For A Retirement Home

You could also decide to take up residence in a retirement home someday. There are many different kinds of senior living arrangements you could consider using. Some retirement communities are more like a healthcare facility with rooms and faculty trained in geriatric care. Other places offer more independence like 55+ housing communities and neighborhoods.

Age-restricted housing communities can be a great option for retirement because they often have lower pricing or special benefits, amenities, activities, or HOA perks to enjoy. You can also find 55+ housing in apartments or single-family homes.

To get the most accurate pricing for how much you need for a retirement home you’ll want to research retirement housing in the area you want to retire in. Then adjust those prices with inflation using the US inflation calculator.

Otherwise, some research suggests that on average retirement homes can cost between $1,500 and $10,000 a month.

How Much Money Do You Need For Medical In Retirement

Depending on your health, the cost of healthcare in retirement can be expensive. Even if your employer has a retirement plan or if you qualify for Medicare, most likely you’ll still have to pay for part of your healthcare costs.

The Fidelity Retiree Health Care Cost Estimate says that if a retired couple wants to retire at 65 then they’ll want to save about $285,000 for potential medical costs.

A great way to save for medical in retirement is to enroll in a Health Savings Account (HSA) health plan with your employer. This is like a retirement plan specifically for medical needs in retirement.

How Much Money Do You Need Per Month For Retirement

To figure out how much you need a month in retirement is to consider how much you need each month now, and reduce that amount to just 80%.

For instance, say you need $5,000 a month in your life right now. You can expect to need about $4,000 a month in retirement.

Current Monthly Income x 0.80 (80%) = Suggested Monthly Income for Retirement

$5,000 x 0.80 = $4,000

When saving for retirement, remember that life can be unexpected. You might need emergency spending for medical expenses or other sudden expenses. Or you might need discretionary spending for vacations, traveling, gifts, or hobbies. Planning for retirement money in the future is also a big part of budgeting for today. When creating a household budget, don’t forget to put money away into your savings accounts and retirement funds.

Ultimately, the key to saving up for retirement is to start today and sit down frequently to think practically about your future, even if retirement seems far away right now.


Sources


Investopedia. “Understanding Your 401(k) Benefits: Tax Breaks, an Employer Match, and More 401(K) Benefits,” by Amy Bell.

Quicken. “4 Things to Do with Your 401(k) When You Change Jobs,” by Kathryn Bergeron.

Investopedia. “Individual Retirement Account (IRA),” by Julia Kagan.

The Balance Careers. “Average Salary Information for U.S. Workers,” by Alison Doyle.

Sapling. “The Average Cost of Retirement Homes,” by Lauren Wellbank.

Fidelity. “How to plan for rising health care costs.”

55Places.com. “How Much Monthly Income Do You Need During Retirement?” by Bill Ness.

The Balance. “How Much Money Do I Need to Retire?” by Jeremy Vohwinkle.

Nerd Wallet. “Retirement Calculator.”

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