How much money do you lot need to comfortably retire? $1 1000000? $2 million? More?

Fiscal planners ofttimes recommend replacing about 80% of your pre-retirement income to sustain the aforementioned lifestyle later you lot retire. That means if you lot earn $100,000 per year, yous'd aim for at to the lowest degree $80,000 of income (in today's dollars) in retirement.

However, there are several factors to consider, and not all of this income will demand to come from your savings. With that in mind, here'due south a guide to help calculate how much money y'all volition need to retire.

It's not about coin, it'southward about income

One important point when it comes to determining your retirement "number" is that it isn't about deciding on a certain corporeality of savings. For example, the almost common retirement goal amongst Americans is a $i million nest egg. But this is faulty logic.

Retirement paper with calculator and coffee mug.

Image source: Getty Images.

The most important cistron in determining how much you need to retire is whether you'll have enough coin to create the income you need to back up your desired quality of life afterwards you retire. Volition a $1 million savings balance let you to create plenty income forever? Peradventure, just maybe not. That'southward what we're going to determine in this commodity.

Then how much income do you need?

The reason y'all don't need to replace 100% of your pre-retirement income is that when you retire, y'all're typically able to eliminate certain expenses. For example:

  • Y'all'll no longer have to save for retirement (patently).
  • Y'all might spend less on commuting expenses and other costs related to going to work.
  • You may take paid off your mortgage by the time you retire.
  • You may not need life insurance if yous no longer have dependents.

But retiring on 80% of your annual income isn't perfect for everyone. You lot might want to adjust your goal up or downwards based on the blazon of retirement lifestyle you lot plan to have and if your expenses will be significantly different.

For example, if you plan to travel frequently in retirement, you may want to aim for xc% to 100% of your pre-retirement income. On the other mitt, if you plan to pay off your mortgage before you retire or downsize your living state of affairs, you may exist able to alive comfortably on less than 80%.

Let's say you consider yourself the typical retiree. Between yous and your spouse, you currently have an annual income of $120,000. Based on the fourscore% principle, you can wait to need about $96,000 in almanac income after you retire, which is $8,000 per month.

Social Security, pensions, and other reliable income sources

The skilful news is that, if you're like virtually people, y'all'll get some assistance from sources other than your savings, such equally your Social Security benefits. For most people, Social Security is a significant income source.

But the percentage of income that Social Security volition supervene upon is typically lower for higher-income retirees. For example, Fidelity estimates that someone earning $50,000 a year can expect Social Security to supercede 35% of their income. But someone earning $300,000 a year would have a Social Security income replacement rate of just 11% on average.

If you aren't sure how much you can await, check your latest Social Security argument, or create a my Social Security account to get a good estimate based on your work history.

If you have any pensions from current or onetime jobs, exist sure to have those into consideration. The same goes for any other predictable and permanent sources of income -- for example, if you bought an annuity that kicks in afterwards you retire.

Continuing our example of a couple that needs $eight,000 in monthly income to retire, let's say each spouse is expecting $ane,500 per month from Social Security, and that ane spouse as well has a $1,000 monthly pension. This means that, of the $8,000 in monthly income needs, $4,000 is being taken care of by sources other than savings.

So, in summary, you can gauge the monthly retirement income yous need to generate using this formula:

Monthly income required = Estimated monthly retirement expenses-Monthly retirement income from other sources

How much savings volition you need to retire?

Now permit'due south make up one's mind how much savings you'll demand to retire. Later you've figured out how much income y'all'll need to generate from your savings, the next pace is to calculate how big your retirement nest egg needs to be for you to produce this much income in perpetuity.

A retirement figurer is ane option. Or, yous tin can use the "four% rule." The 4% rule says that in your showtime yr of retirement, you can withdraw iv% of your retirement savings.

So, if you have $1 million saved, y'all would take $40,000 out during your offset year of retirement either in a lump sum or as a series of payments. In subsequent years of retirement, yous would adjust this corporeality upwardly to keep up with cost-of-living increases.

By only withdrawing 4% of your retirement savings per year, your money has a better chance of lasting for 30 years.

The most important consideration in deciding how much you need to retire is whether you'll have enough coin to create the income you need to support your desired quality of life later you retire.

The thought is that if you lot follow this rule, you shouldn't have to worry about running out of money in retirement. Specifically, the 4% dominion is designed to make sure your money has a high probability of lasting for a minimum of 30 years.

To calculate a retirement savings target based on the iv% rule, you utilize the following formula:

Retirement savings target = Annual income required ten 25

Continuing our example, we saw in the previous section that our couple would need $four,000 per month ($48,000 per year) from their savings. And then, in this example, our couple should aim for $1.2 million in retirement savings accounts, such as a 401(k) plan or individual retirement business relationship (IRA), to provide $48,000 per year in sustainable retirement income.

It's important to note that the iv% rule has a number of flaws. It assumes you'll withdraw the same amount each year in retirement, adjusted for inflation. Information technology also assumes your portfolio will be split betwixt stocks and bonds throughout your retirement.

The lesser line on retirement savings goals

At that place is no perfect method of calculating your retirement savings target. Investment performance will vary over time, and information technology tin exist difficult to accurately project your actual income needs.

Furthermore, information technology's worth mentioning that non all retirement plans are equal when it comes to income. Coin you withdraw from a traditional IRA or 401(k) will be considered taxable income. On the other hand, any coin you withdraw from a Roth IRA or Roth 401(1000) is mostly not taxable at all, which may change the calculation a bit.

There are other potential considerations as well. Many workers accept to retire earlier than they planned. For example, nigh 3 million workers retired earlier than they predictable because of the COVID-19 pandemic. Even in normal times, older workers often have to retire early on due to layoffs, wellness problems, or caregiving duties. Saving for a longer retirement than anticipated gives y'all a safety absorber.

It's also of import to consider the impact of inflation on your retirement plans. Inflation has gotten a lot of attending in 2022 as prices have increased at the fastest pace we've seen in 40 years. Merely even when costs rising at a typical charge per unit, inflation hits senior households harder than working-historic period households. That's because seniors spend a college portion of their incomes on expenses such as healthcare and housing, which tend to increase faster than the overall inflation rate.

While we're trying to nowadays the broad strokes here, it'south still a good idea to consult a financial counselor who tin can not merely tailor a retirement savings goal to your particular situation merely tin also help prepare yous on the right path with a savings and investment program that can make sure you lot reach your goals.

By using the methods discussed in this article, you can get a proficient idea of how much you'll demand to save to retire comfortably. Go on in listen this isn't designed to be a perfect method but a starting signal to assistance you appraise where yous are and what adjustments you might need to brand to go where you need to be.

Expert Q&A

The Motley Fool caught up with retirement adept David John, a senior strategic policy advisor at the AARP Public Policy Institute.

David C. John, MA, MBA, AARP Senior Policy Advisor

David C. John, MA, MBA, AARP Senior Policy Counselor. David's areas of focus are retirement savings, pensions, annuities, international alimony and retirement savings systems, and Pension Benefit Guaranty Corporation (PBGC).

The Motley Fool: What is your communication for someone who may exist worried about retiring considering of recent fiscal setbacks?

David John: If your health, family unit responsibilities, and task status allows, continue to work longer than you might accept earlier. The extra fourth dimension allows you to relieve more and for the markets to continue to recover from past losses. Well-nigh important, delay taking your Social Security for as long as possible so yous'll have a larger, inflation-protected benefit.

The Motley Fool: At that place are no hard and fast rules nigh when to retire or how much we should accept saved, merely what iii pieces of advice would y'all give someone who is only starting their first retirement savings business relationship?

David John:

  1. Make saving a priority and contribute a consistent percentage of your income that grows over time every payday.
  2. Invest only in a diversified option like a target date fund that uses passive alphabetize funds. Don't endeavour to beat the market with your retirement money.
  3. Don't take a withdrawal unless yous absolutely have to. Instead, get-go a separate emergency fund in addition to your retirement business relationship.