If you work with a financial advisor, you've no doubt been presented with a long-term plan that tells you how much you'll need to save for retirement. The plan is likely based on your lifestyle, how long you plan to work full-time, your health, your interests, and other factors.
If you don't have a financial advisor, it can be a bit daunting to understand how much savings you'll need for retirement. Thankfully, there are some basic formulas you can follow to help you determine just how much you'll need. Here are a few that are simple but effective.
Some general rules
Exactly how much you'll need in retirement will be based on your specific situation. Some of the key determinants are if your mortgage will be paid off, how long you plan to work, if you'll still work in retirement, if you plan to travel extensively, if you buy a second home or downsize and move to a cheaper region, how much your spouse has saved, your health status, and if you'll need to care for others.
But there are some general rules that you can follow to get a ballpark assessment of where you'll need to be to live comfortably in retirement. And based on a deeper analysis of your spending habits and needs, as well as some of the other factors mentioned, you can adjust the number upward or downward.
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One of the most simple and effective formulas says you'll need 10 to 12 times the amount of money you made in your final year before retirement. So, if you retired at 65 with a salary of 100,000, you would need 10 to 12 times that -- which would be $1 million to $1.2 million. If you made $80,000 in your final year, it would be $800,000 to $960,000.
There is also the 80% rule, which says you should plan on spending about 80% of your final year's salary in each year of retirement. So, 80% of $80,000 is $64,000 -- which means you would spend $64,000 per year times say 25, for 25 years in retirement. That comes out to roughly $1.6 million. To me, that seems too high, as I'm pretty frugal and I don't foresee spending anywhere near that much, especially later in retirement. But everyone is different.
Of course, it is always best to err on the side of caution, so if you were able to save enough to have 80% of your pre-retirement income available to you for each year in retirement, you'd probably be in great shape.
Guideposts along the way
When making these calculations, it is important to factor in all of your retirement accounts and investments. For most people, their biggest source of retirement savings is their 401(k) or pension. You may also have an individual retirement account (IRA) on the side, as well as a portfolio of stocks or exchange-traded funds outside of your 401(k) or employer-sponsored plan. And don't forget about Social Security income. Also consider retirement savings accumulated by a spouse, if you have one.
To give you a better sense of where you are on that road right now, you should have about twice your salary at age 30, three times by 40, six times by 50, eight times by 60, and at least 10 times by retirement age. If you're not on this track, it may be time to revisit your retirement savings strategy.
If you do have an array of disparate retirement accounts, it might be a good idea to work with a financial advisor who can help you bring them under one umbrella and give you a better sense of how much you'll need.
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