How Much Do We Need to Retire?
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When we did our taxes a couple years back, we were advised to contribute more to retirement.
She explained to us that it could lower our taxable income and set aside our money for retirement.
We've taken her advice and have been contributing towards our retirement.
Figuring Out How Much We Need to Retire
The problem was we didn't have a hardcore number to work towards. I dug around and found some numbers that gave us a ballpark figure.
If you're in the same boat, here's what you need to know to find your number.
Identify Your Retirement Expenses
If you're looking for some specific numbers to base your information on, here's some information from one study done:
The ongoing Georgia State University RETIRE (Retirement Income Replacement) project, conducted for the federal Department of Labor, looks at the income requirements of households before and after retirement at three-year intervals.
In 2004, the project found:
- A single-earner couple making $30,000 annually needs 84 percent of that income, or $25,200 a year, after retirement.
- A $50,000 to $60,000 single-earner couple needs to replace 79 percent of their pre-retirement income, or $39,500 to $47,400 a year.
- A two-income couple needs to replace 84 percent of $30,000 a year pre-retirement ($25,200), 77 percent of $50,000 ($38,500) and 78 percent of $90,000 ($70,200).
- A $90,000 single-earner couple needs to replace 82 percent of pre-retirement income, or $73,800 a year.
While these aren't bulletproof numbers, they can at least help you determine how much you need for retirement.
According to the GSU study, we're looking at having expenses that around 77% of our current income.
Identify Retirement Income
Since you now have a general idea of how much you'll need on an annual basis, you should do an assessment of your expected income streams during your retirement period.
I'm going to list the main ones people encounter, but if you have an additional income, please include it.
We do not have any expected windfalls or inheritance, so we aren't including those in our calculations.
Social Security Payments
I'm personally a little leery of using Social Security as part of my calculations. There has to be a major overhaul of the program if it's going to last when I retire.
My assumption is that you'll at least have to wait later until you can claim benefits.
Since we're planning on taking retirement before then, we'll not be relying on these payments when working on our retirement contribution plan.
However, if you're closer to retirement, you may want to go ahead and include your expected Social Security payments into your calculations.
A 401(k) is part of the US Internal Revenue Code that deals with retirement plans, and which defers the taxation of your retirement savings.
One big benefit of some 401(k) plans is the employer match.
Some employers will match a percentage of your retirement contributions – effectively adding free money into your account.
That can help you as the money grows along with your contributions, speeding up the progress that you make.
Not every company offer this, but it is definitely to your benefit to check with Human Resources and see if your company does.
You'll also want to check to see if there are stipulations on your 401(k) matches, like a vestment period.
My husband's job offers a 401(k) plan and a matching plan, which he takes advantage of. He had set up a portion of his pay to be taken out automatically be invested in his plan.
He invests in some of the index funds offered with the plan. He started as soon as he could (when he became a permanent employee) and
Individual Retirement Accounts (IRA)
If you’ve never opened an IRA before, you should review some of the pros and cons of a traditional or a Roth account.
The main difference between the two IRAs has to do with when you’ll be taxed:
- Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
- Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.
Source: IRS Publication 590
I have a Roth IRA that I contribute towards. I invest mainly in various index funds.
Maximize Your Retirement Contributions
If you have the money, then look at maximizing your contributions. Currently, the contribution limits are
- 401K – $18,000
- Roth/traditional IRA – $5,500 ($6,500 if you're 50 or over)
Please keep in mind that these annual limits are per person. For example, a couple can contribute $11,000 total annually to their Roth IRAs.
If you have high-interest debts, then hold off on making contributions on your IRA and only contribute to your 401(k) to get the employer match.
With credit card rates around 20% and higher, it would be smarter to pay this debt first off first.
While you may be limited on what you can contribute now, you should plan ahead for when you can increase your deposits.
Developing a Retirement Plan
Now that there's a general number, the next step is coming up with a plan to actually get started with investing for your own retirement.
Participate in 401(ks)
As mentioned before, my husband has been regularly contributing to his account at work.
Some personal finance experts suggest put 5- 10% of your paycheck. You can always increase the amount as you receive raises and promotions.
If your company an Employee Stock Purchase Program, you may want to consider participating. ESSP allows you to have some of your paychecks deducted to buy your company’s shares at a discount from its market price.
Just remember to be diversified with your retirement fund and not too heavily invested in your company.
Contribute to an IRA
If your job doesn't offer a 401(k), then you may want to look into opening an IRA. You have many options for starting one.
Banks, brokerages, and credit unions offer IRAs. Some of my favorite options to look into:
Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this.
Compare your options to see if you’re getting a good deal.
If you want a system that is easy to manage and has a track record of long-term growth, you want to look for low-cost index funds to put your money in.
If you're looking at getting started, check out my guide to investing with a $1,000 or less.
If you really want to run the numbers for yourself, please check out some of the spreadsheets below.
- Retirement Planner
- This one includes pension, social security, and IRA calculations
- 401 Calculator
- Compare 401k savings to “regular” saving
- Another 401 calculator
Thoughts on Your Retirement Number
How many of you have come up with a ballpark figure on how much you need to retire?
What tools have you used to estimate your retirement goals? Are you counting on Social Security for your retirement plans?
I haven’t bothered to figure out my retirement number yet, mainly because I have no idea what it should be. I prefer to just save as much as I can afford, and evaluate this as I get closer to retirement age.
77% sounds awfully high for retirement. Consider what percentage of your income you currently contribute towards your mortgage and to your retirement account now. You won’t have those expenses in retirement. That could easily be 30% of your expenses that you won’t have in retirement. Your current savings plan for your child’s education needs to be factored in as well.
My guess is that you can live comfortably on 40-60% of your pre-retirement income.
It does seem higher than I would’ve thought too. One argument I read for having the high percentage is that health care will be more expensive as more expenses shift towards seniors. While I hope that isn’t the case, I’ll be keeping an eye on it and will try to plan accordingly.
Part of me wants to figure out what my retirement number will be, and of course, start saving now. I’m not going to rely on social security at all since it won’t be available to me when I’m ready to leave. 401ks probably won’t be in my plans either if I truly become a full time entrepreneur. I’m going to have to focus on maxing out Roth IRAs and finding investing opportunities like micro-lending. Also, part of me doesn’t feel like I’m going to retire at all if I really love what I do.
I agree! If you’re going the entrepreneurship route, J from Budgets are Sexy has some posts on his retirement savings. Even if you continue working part time during ‘retirement’, having a cushion can help you take on projects that you enjoy rather than just to pay bills.
Hi there! Not sure how I found your blog but love it. Even though I’m not a “couple”, all my friends are 🙂
My number is 25x’s the income I think I could live off at retirement. So if you think you can live off of 60k per year, when you retire you’d need 1.5 million. The 25x comes from assuming a 4% withdraw rate each year on your money. Then, I back in how much I’m getting from 401k, (I don’t factor in SS, that’s a “maybe” in my mind)…. and then I know I need to make up the rest!!
Also, as a side note, if a spouse contributes to a 401l(k) then the partner contributes to an IRA, the tax deduction the partner gets from the IRA is limited… so it’s something to look into.
People need to be saving 20% – 25% of their income. We’re living longer and also expected annualized returns (on stocks) has come down, so our money will be making less.
Thanks Kathryn for sharing your tips! You’re right that we all have to look at the percentage we’re allocating now for the future. Social Security will be a bonus if we do collect it when we retire.
Great site by the way – had to RT your 1st linkfest!
I think somewhere around $3 million or so should suffice for most people for sure. I don’t plan to have any mortgage debt in retirement, so my cost of living should go way down.
I think you’re right – unless you plan on having huge expenses during retirement, then $3 million can work.
I haven’t formally come up with a number yet. $2.5 million sure sounds like a large total. I would hope that you could get more than $45,000 income from that although based upon expected inflation, it could actually require about double that in adjusted dollars which would make more sense.
The most important part of my retirement plan is to be debt free. I am not close yet but am trying to focus on that while still saving. Even if you don’t plan on retiring and doing what you love, many are forced into retirement due to health issues.
Something you touched on briefly, but I think needs a little more emphasis in this post is to be honest about your lifestyle when you estimate your retirement amount.
And I don’t mean lifestyle in how much you want to party in your sixties, instead think about health needs (i.e. family history), where you live (i.e. natural disasters that might up your insurance payments later down the line) and how risk adverse you are.
This is an amazing post–but I recommend not taking the number you get out at face value, make sure to personalize it.
Great article elle – retirement planning is difficult for us younger people because having a firm number relies on so many different variables coming through. While you may need to have 2.5m saved for retirement, you could need considerably less – or more.
My retirement will be a mixture of IRA (roth), social security (not counting on that), possibly a pension and possibly a 401k, depending on what happens later in life.
for now, i’m just getting rid of debt, saving for near and medium term expenses and continuing to save.
You make a good point about coming up with a retirement number together as a couple. My husband and I sat down and put together our financial goals shortly after we got married and it felt really good. I’d always had my own savings goals as did he but putting ours together really helped us feel more united and motivated to work towards retirement together. -Sydney
Great article. I never calculated my numbers because I didn’t want to scare myself. 77% and 2.5 million? Scary, but can’t just stick my head in the sand. When someone retires and can’t hit those numbers, can’t they just attempt to live in a lower income bracket? Easier said than done, but you have to do whatever it takes to get through your golden years.