Retirement experts have offered various rules of thumb about how much you need to save: somewhere near $1 million, 80 to 90% of your annual pre-retirement income, 12 times your pre-retirement salary.

But what’s right for you? And how do you know you’re on track?”Because there are so many variables, even the retirement researchers can’t agree on a total dollar amount,” says Ben Storey, Director, Retirement Thought Leadership, Bank of America. “What each person needs will vary widely based on a number of factors.”

Putting all of the above into consideration, let’s see the ideal savings you need to retire.

• How much do I Need to Retire?
• How much Should you have saved for Retirement by Age?
• What is the Magic Retirement Number?
• How do you Calculate how much you Need to Retire?
• What is the Best Age to Retire?

How much do I Need to Retire?

Figuring out how much money you need to retire is like one of those word problems from high school that still haunts you. “If X equals your spending in retirement, Y equals your rate of return and Z equals the number of years you will live, how much will you need to save, given that X, Y and Z are all unknowable?”

Read Also: Investing for Retirement: The Complete Guide

The retirement equation isn’t unsolvable, but it’s not a precise calculation, either. You’ll need to revisit your retirement formula once or twice a year to make sure it’s on track, and be prepared to make adjustments if it isn’t. Weigh these four factors to get a better handle on how much money you will need to retire.

1. How much will you spend?

The rule of thumb is that you’ll need about 80 percent of your pre-retirement income when you leave your job, although that rule requires a pretty flexible thumb.

The 80 percent rule comes from the fact that you will no longer be paying payroll taxes toward Social Security (although you may have to pay some taxes on your Social Security benefits), and you won’t be shoveling money into your 401(k) or other savings plan.

In addition, you’ll save on the usual costs of going to work — the pandemic won’t keep everyone at home forever — such as new clothing, dry cleaning bills, commuting expenses and the like.You also need to factor in any pension or Social Security income you’ll be getting.

If your annual pre-retirement expenses are $50,000, for example, you’d want retirement income of $40,000 if you followed the 80 percent rule of thumb. If you and your spouse will collect $2,000 a month from Social Security, or $24,000 a year, you’d need about $16,000 a year from your savings.

Bear in mind, however, that any withdrawals from a tax-deferred savings account, such as a traditional IRA or a 401(k) plan, would be reduced by the amount of taxes you pay.

This calculation doesn’t consider other things you might want to spend money on. “In the first three years of retirement, the biggest expense is often travel,” says Mark Bass, a financial planner in Lubbock, Texas.

“They want to take a four-week trip somewhere, maybe pay business class to get there, and it can cost $20,000 or so.” That’s not a problem, Bass says, as long as you build it into your budget and the trip doesn’t end in the poorhouse.

Medical care is another expense that people in retirement often don’t factor in. The standard monthly premium for Medicare Part B, which covers most doctors’ services, is $144.60 or higher, depending on your income.

You also have to pay 20 percent of the Medicare-approved amount for doctor’s bills as well as a $198 deductible.

All told, the average couple will need $295,000 after taxes to cover medical expenses in retirement, excluding long-term care, according to estimates from Fidelity Investments.

Finally, there’s the question of how much, if anything, you wish to leave to your children or charity. Some people want to leave their entire savings to their children or the church of their choice — which is fine, but it requires a much higher savings rate than a plan that simply wants your money to last as long as you do.

2. How much will you earn on your savings?

No one knows what stocks, bonds or bank certificates of deposit will earn in the next 20 years or so. We can look at long-term historical returns to get some ideas.

According to Morningstar, stocks have earned an average 10.29 percent a year since 1926 — a period that includes the Great Depression as well as the Great Recession.

Bonds have earned an average 5.33 percent a year over the same time. Treasury bills, a proxy for what you might get from a bank deposit, have returned about 3 percent a year.

Most people don’t keep 100 percent of their retirement savings in a single investment, however. While they might have part of their portfolio in stocks for growth of capital, they often have part in bonds to cushion the inevitable declines in stocks.

According to the Vanguard Group, a mix of 60 percent stocks and 40 percent bonds has returned an average 8.77 percent a year since 1926; a mix of 60 percent bonds and 40 percent stocks has gained an average 7.77 percent.

Financial planners often recommend caution when estimating portfolio returns. Gary Schatsky, a New York financial planner, aims at 2.5 percent returns after inflation, which would be about 3.5 percent today.

“It’s an extraordinarily low number,” he says, although it’s probably better to aim too low and be wrong than aim too high and be wrong.

3. How long will you live?

Since no one really knows the answer to that question, it’s best to look at averages. At 65, the average man can expect to live another 18 years, to 83, according to Social Security. The average 65-year-old woman can expect another 20.5 years, to 85 1/2.

“Most people err on the shorter side of the estimate,” says Schatsky. That can be a big misjudgment: If you plan your retirement based on living to 80, your 81st birthday might not be as festive as you’d like.

It makes sense to think about how long your parents and grandparents lived when you try to estimate how long you’ll need your money.

“If you’re married and both sets of parents lived into their late 90s, the only way you’re not getting there is if don’t look both ways when you cross the street,” Bass, the Texas financial planner, says.

Unless you know you’re in frail health, however, it’s probably best to plan to live 25 years after retirement — to age 90.

4. How much can you withdraw from savings each year?

A landmark 1998 study from Trinity College in Texas tried to find the most sustainable withdrawal rate from retirement savings accounts over various time periods.

The study found that an investor with a portfolio of 50 percent stocks and 50 percent bonds could withdraw 4 percent of the portfolio in the first year and adjust the withdrawal amount by the rate of inflation each subsequent year with little danger of running out of money before dying.

For example, if you have $250,000 in savings, you could withdraw $10,000 in the first year and adjust that amount upward for inflation each year for the next 30 years.

Higher withdrawal rates starting above 7 percent annually greatly increased the odds that the portfolio would run out of money within 30 years.

More recent analyses of the 4 percent rule have suggested that you can improve on the Trinity results with a few simple adjustments — not withdrawing money from your stock fund in a bear-market year, for example, or foregoing inflation “raises” for several years at a time.

At least at first, however, it’s best to be conservative in withdrawals from your savings, if you can.

The 4 percent rule is very conservative for most people: A $1 million retirement nest egg would generate $40,000 a year in income. For many people, working a bit longer will help close up the savings gap.

Not only will you continue to bring in a paycheck, but you’ll get the advantage of delaying Social Security benefits, which rise each year you wait by 8 percent between your full retirement age and age 70.

And it lets you save more. “It’s a serious decision when you decide to retire, because you can’t turn the spigot back on,” says Schatsky. “Every day you work gives you the ability to increase your retirement enjoyment later.”

How much Should you have saved for Retirement by Age?

It’s important to remember these benchmarks may not work for everyone. The most imperative thing is to make sure you are assessing your financial position, planning for the future and making adjustments when needed at each stage of your life.

Below are some suggestions from experts to help you decide how much you should be saving for your retirement.

By Your 30s

Fidelity says: At this age, you’ll want one times your current salary.

Meghan Murphy, a vice president at Fidelity, says that by age 30 – and, ideally, in your 20s – you can do this by making sure you are taking advantage of your employer match option in your company-sponsored retirement plan. On average, employers will match about 4.5% of compensation, she says.

T. Rowe Price says: At 30, you’ll want one-half times your current salary, and by 35, you’ll want one times your salary.

“These aren’t the hard and fast rules,” Young says. “If you are behind at age 35, you have time to recover. But it’s good to have some sense that are you behind and you want to get serious about saving.”

Others say: Moddasser maintains that the benchmark rules “discount the fact that there might be better things you could be doing with your time.” In your 30s, she says, the number one thing you should be focusing on is paying down your debt.

Then, she advises making a 10-year financial plan to figure out how you can do that during this decade while also planning for down payments on a house or investing in your career (such as getting additional certifications or degrees).

Wade Pfau, a professor of retirement income at The American College who studied the safe savings rate for retirement, says starting at 35, you should be saving 16% of your income each year in order to retire at age 65.

By Your 40s

Fidelity says: At this age, you’ll want three times your current salary in savings.

Rowe Price says: At 40, you’ll want two times your current salary, and by 45, you’ll want three times your salary.

Others say: Your 40s should be a time to focus on your earning power and to try to make as much money as you can, Moddasser says. If you have kids, this is also the stage where you should be considering contributing to 529 plans to pay for their college education, she adds.

Lucienne Hinger Hubiak, a Certified Financial Planner at Mint, says a great rule of thumb is the 70-20-10 spending guideline. Living expenses should be about 70% of your monthly income, debt payments (if you have any) should be about 20% of your monthly income and savings (for both long and short term goals) should take the remaining 10% of your monthly income.

By Your 50s

Fidelity says: At this age, you’ll want six times your current salary.

T. Rowe Price says: At 50, you’ll want five times your current salary, and by 55, you’ll want seven times your salary.

Others say: According to a 2018 Vanguard study, the average 401(k) balance for those ages 45 to 54 was $129,051, while those for ages 55 to 64 was $190,505. (That’s the actual amount, as opposed to the loftier goal. It doesn’t include any separate IRA balance workers may have.)

Ideally, according to Vanguard, you’ll want to save 12% to 15%. By age 50, you should be well on your way.

According to J.P. Morgan, these “retirement checkpoints” depend on your household income. At 50, if your household income is $75,000, you should strive to have 3.9 times your income saved if you want to retire at 65.

However, if you are 50 and your household income is $150,000, you should have saved 5.4 times your income. (There’s a good reason upper-income folks should have more saved: Social Security replaces a lower percentage of their pre-retirement income.)

By Your 60s

Fidelity says: At 60, you’ll want eight times your current salary, so by 67 (retirement age), you’ll have 10 times your salary saved.

T. Rowe Price says: At 60, you’ll want nine times your current salary, and by 65, you’ll want 11 times your salary.

Others say: This is the point in your life when you should be saving most aggressively in order to maintain your current lifestyle in retirement.

This decade – presumably your highest earning years – will “define your lifestyle for the rest of your life,” Moddasser says.

What is the Magic Retirement Number?

When it comes to retirement savings, theory often differs from reality. On average, Americans believe they need $1.7 million to retire, according to a recent survey fromCharles Schwab, which looked at 1,000 participants in 401(k) plans nationwide.

In fact, “that’s a pretty good number if you average out age and median salary across the U.S.,” said Nathan Voris, a managing director at Schwab Retirement Plan Services.

However, “the bulk of folks do not get there,” he said.

More than half of those polled are contributing 10% or less of their salary to their 401(k) — their largest source of retirement savings — with an average annual contribution of $8,788, Schwab found.

That’s is a good start but may not suffice for most, Voris said, especially if you start saving for retirement later in life.

For example, if you start in your 20s, stashing 10% to 15% of your salary each year could be enough to retire comfortably, according to Schwab. But if you don’t start until age 45 or older, you would need to set aside as much as 35% of your salary annually — a goal few workers achieve.

In addition to those basic guidelines, experts recommend using a retirement calculator to get a more accurate picture of your retirement number.

The discrepancy between retirement confidence and preparation is not new. Two-thirds of U.S. workers said they are very or somewhat confident they’ll be able to live comfortably throughout retirement, according to a study by the Employee Benefit Research Institute.

Yet only 42% have done any retirement calculations, EBRI found. And fewer than 1 in 3 workers has tried to figure out how much money is needed for medical expenses.

To be sure, savers have come a long way since the Pension Protection Act of 2006, which made it easier for companies to automatically enroll their employees in 401(k) plans.

Now, 401(k) balances are near all-time highs, averaging $103,700 as of the first quarter of 2019, according to a separate report by Fidelity, the nation’s largest provider of 401(k) plans.

And for those who have stuck with the same 401(k) plan for 10 years or more, the returns are even greater. Among accounts that have been continuously invested over the last decade (a subset of the overall group above), the average 401(k) balance rose by 466% to roughly $297,700, Fidelity said.

How do you Calculate how much you Need to Retire?

One of the most difficult parts of retirement planning is calculating how much money you should aim to save before retiring. According to the U.S. Government, the three most common options to save for retirement are:

1. Retirement plans offered by an employer
2. Savings and investment
3. Social Security

There are several guides that list percentages you should try to hit. For example, many financial experts say you want to replace between 70% to 85% of your pre-retirement income. If you earn $100,000 a year, your goal should be to create enough retirement savings that you would be able to live on somewhere between $70,000 to $85,000 per year. In the U.S. people live an average of 20 years after retirement.

Problems Basing Retirement Needs on Current Income

Unfortunately, this rule of thumb isn’t helpful for people who are in the early stages of their careers. If you’re in your 20s or 30s, you’re likely earning an income that reflects your entry or intermediate-level position within a given career. If you’re in the middle of your career but have decided to make a career change, you may also temporarily experience lower pay that affects your retirement-savings formula.

When you’re unsure what your pre-retirement income is going to be, it becomes difficult to project the amount you’ll need during your senior years.

What If You’re a Saver?

Another problem with the “replace your income” rule of thumb is that this advice hinges on the assumption that you spend the majority of your income.

If you typically save 10% to 15% of your income for retirement and perhaps another 10% to 15% of your income for other non-retirement types of savings, then the implication would be that you spent somewhere around 70% to 85% of your income.

It makes sense under that very specific set of circumstances that if you spend the majority of what you make and you don’t expect your spending habits to change whatsoever during retirement, then you would need to create enough money so everything would stay the same.

However, it isn’t necessarily the case that people spend the bulk of what they make. Some people spend more than what they earn, ending up in credit card debt, while others spend significantly less than the amount that they earn.

This is the second, more compelling reason why basing your retirement projections on your former income (rather than your projected expenses) is not the best framework for planning. 

Focus on Spending, Not Income

As such, it’s wise to calibrate retirement projections on your level of spending rather than on your income. This solves both of the two problems addressed above.

The Bureau of Labor Statistics saw a 1.5% decrease in income and a 4.8% increase in expenditures in their 2018 consumer report. Among the different categories, personal insurance and pension expenditures represented the largest percentage increase with a 7.8% rise, followed by a 2.5% rise in food expenditures. The only decrease among the largest categories was a 5.6% drop in educational spending.

Your spending in retirement will most likely be different than your spending today. In retirement, for example, you may not have a mortgage payment. Your children may be grown and living on their own, and you’ll no longer need to support them. Costs related to your work such as childcare, business attire, and commuting costs will also dissipate.

You will have other expenses that you don’t currently have today. Out-of-pocket prescription and medical costs will might be a bigger concern. You may also want to outsource home-related tasks that you currently do yourself such as cleaning gutters, raking leaves, or shoveling snow when you’re in your 70s. You may also choose to travel more or use your retirement to explore hobbies that you couldn’t pursue during your working years.

All of this leads to a second quandary, which is that while income is not a suitable basis for determining how much money you should have in your retirement portfolio, expenses are not a perfect option either. However, in lieu of better alternatives, expenses may be the best benchmark for how large of a portfolio you should aim to create.

Assuming that some of your current expenses will decline but others will grow, then it’s reasonable to project that the amount you currently spend will be close to the amount you spend during your retirement years.

Multiply Current Annual Spending by 25

Here’s a broad rule of thumb that you can use to determine the amount of money you will need when you retire. Multiply your current annual spending by 25. That’s the size your portfolio will need to be in retirement for you to safely withdraw 4% of that portfolio amount every year to live on. 

For example, if you currently spend $40,000 per year, you will need an investment portfolio that’s 25 times that size—$1 million at the beginning of your retirement. This sum is large enough for you to withdraw 4% of that $1 million retirement portfolio in your first year of retirement, and that same 4% adjusted for inflation every subsequent year, while maintaining a reasonable chance that you won’t outlive your money. 

This may sound daunting, but if you begin saving for retirement at an early age—as early as your 20s—you could amass a $1 million portfolio even on a salary of only $30,000 to $40,000.

If You Got a Late Start With Saving

If you’re starting later in life, don’t despair. The key thing that you need to remember is that the best way to compensate for getting a late start is to aggressively contribute to your accounts.

Save Harder: The older you are, the more you should be saving and diversifying for retirement each month. Don’t over-allocate a portion of your portfolio to stocks on the grounds that you need riskier investments to compensate for lost decades of savings. Risk cuts both ways, and if your investments suffer, you won’t have as much time to recover.

Use Index Funds: Look for low-fee index funds and spread your investments between a reasonable mix of stocks and bonds. Keep continuing to do that regularly through the rest of your working career with a goal of saving 25 times your current level of spending by the day that you retire.

Keep on Track: Use retirement calculators to make sure that you are on track, and don’t pay too much attention to scary headlines in the financial news. You are playing a long-term game, and getting caught up in the daily turbulence of the market will only curb your progress.

Redefine What Retirement Means

By 2024, the Bureau of Labor Statistics projects that the labor force will grow to about 164 million people. That number includes about 41 million people who will be ages 55 and older—of whom about 13 million are expected to be ages 65 and older.

If you got a late start to saving and need to earn more to make up the difference between what you need and what you have, consider a few alternatives before you “officially” retire:

• If you love your job, it could make sense to stay and take advantage of employer-matching contributions alongside catch-up contributions to your 401(k). Not to mention, you get to keep your other benefits a little longer.
• Use your decades of experience to work part-time as a consultant for a few years while your money continues to grow.
• Start a second career in something you’ve always been passionate about. If taking a pay-cut allows you to be on track to meet your retirement savings needs, embark on a new journey in a new industry for a few more years.

Redefine Lifestyle in Retirement

Maybe you didn’t get a late start with saving but can’t spare the extra change to build a portfolio that reflects your current level of spending. 

If earning extra money isn’t possible, then you might have to redefine what kind of lifestyle you want to live in retirement. There are plenty of ways to cut costs and maintain an active lifestyle in retirement. 

Instead of keeping the house you currently own, it may make more sense to downsize and retire to a state with no income tax. You could take it a step further and retire someplace overseas that has a lower cost-of-living.

There are plenty of ways to make retirement work, you just need to play with the numbers to see what’s possible for you. Even if you don’t envision a $1 million retirement portfolio, save what is reasonable for you, and then evaluate adjust the habits that define your lifestyle.

What is the Best Age to Retire?

When asked when they plan to retire, most people say between 65 and 67. But according to a Gallup survey the average age that people actually retire is 61. Although the lower actual retirement age may include some happy people who realized they had enough money to retire earlier than planned, the reality is that we don’t always get to make that choice.

Some people retire earlier than intended because of job loss, personal health or family situations such as the need to care for an elderly parent. Just as circumstances may compel some to retire early, others may find it necessary to work longer than planned because of financial need.

Nothing is certain in life, but if you’ve been successful at your career and saved steadily into your retirement fund, that decision may be largely up to you.

If you’ve been particularly successful, you may even be in a position to retire in your 50s or even earlier. However, if you plan to retire that early, you should have sources of retirement income other than your 401(k) or IRA in order to avoid paying an early withdrawal penalty.

Here are the major age milestones that can affect your retirement asset planning:

55 – Although in most cases, you can’t take money from your 401(k) until age 59½ without paying a 10% penalty, there are some exceptions to that rule. For example, if you leave or are dismissed from your current employer during or after you reach age 55, you can start taking withdrawals from that employer’s 401(k) plan without penalty.

There are pros and cons for doing so, but if you are considering such a move, make sure you understand the IRS rules on early distributions.

59½ — This is the age when you can start withdrawing money without penalty from your pre-tax retirement accounts such as a company 401(k) or a traditional IRA. Just remember that the amount that you withdraw now counts as taxable income.

62-65 – The youngest age you can start taking Social Security is 62. But if you take your monthly benefit this early, it will be reduced to about 75% of your future full retirement benefit – and it would stay locked in at that level (except for the cost of living increases) even after you reach your full retirement age at 66-67.

You can use the Social Security Administration’s age calculator to enter your birth year to find out what lesser portion of your full benefit you would receive if you should have to start taking your benefits early.

65 – Eligibility for Medicare begins. Even if you are still working and have private health care insurance, you need to sign up for Medicare or face a financial penalty if you do not take action during the enrollment period. When you sign up for Medicare, you might also consider adding a Medicare supplemental plan  because standard Medicare does not cover all costs.

66-67 – Depending on your year of birth, your Full Retirement Age (FRA) will be between 66 and 67. For example, if you were born in 1955, your FRA is 66 years and 2 months while if your birth year was 1959, your FRA is 66 years and 10 months. For those born in 1960 or later, full retirement age is 67.

67-70 – During this age range, your Social Security benefit, if you haven’t already taken it, will increase by 8% for each year you delay taking it until you turn 70. So, if your benefit will be, say, $2,500/month if you start at your full retirement age, it would be more than $3,300/month if you can wait. So, in effect, your Social Security benefit could be more than 30% higher at 70 than if you start taking it at your full retirement age.

However, if you make this choice to delay, know that you could stand to lose up to four years of receiving the lower benefit. Depending on your specific full retirement age, that delay could mean declining a total of $90,000 to $120,000 in benefits at the FRA rate.

If you delay taking the benefit until age 70, it would take you about a decade to fully recoup those total benefits. That said, if you don’t need Social Security during your late 60s and you fully expect to live past 80, opting to maximize your Social Security benefit by taking it later might still be the best choice for you.

70½ – At age 70½, you are required by law to begin taking money out of any pre-tax retirement plans you have such as 401(k)s, IRAs and most pensions and annuities.

Read Also: Should You Put Extra Income Toward Debt or Retirement? We do the Math

These milestones should be considered as you make your decision of when to retire. But the “optimal age” for you to retire will depend on factors such as your anticipated lifespan and whether your savings can provide a sufficient and sustained monthly income for the remainder of your life.

Working with a financial advisor can help you calculate whether your current savings plan is on track to provide the income you will need to maintain your lifestyle in retirement.

Your health and anticipated lifespan are other key factors. If you are in good health and your parents made it to their late 80s or early 90s, that’s good news. But it also means that if you retire at 62 your savings need to last 25-30 years.

If, however, longevity is not in your genes, or if you are already dealing with a medical condition that is expected to limit your lifespan, you may want to make other choices to draw on your funds sooner.

Conclusion

So how much do you need to retire? Well, like we have discussed in this article already, it will depend on a number of factor. However, the important thing is for you start saving for your retirement immediately so that you can enjoy your dream retirement.