How Much Do I Need to Retire?

How Much Do I Need to Retire?

Whether you’re just starting out in your first job, or you’re coming to the end of your work career, you’re probably well aware that you need to save for retirement. In fact, you should save quite a lot because people are living longer and are generally expected to support themselves as they age. This guide will help you figure out exactly how much money you need to save so you can enjoy your golden years worry-free.

Your Cost of Living in Retirement

The first step is to determine how much you'll need to live on each year after you retire. Most retirees are able to live comfortably on 75 to 80% of their former salaries, since they have reduced expenses in their retirement. For example, the median full-time worker approaching retirement is currently earning about $48,000 per year. She would probably need about $38,400 to live on each year in retirement. On the other hand, a full-time worker making more than 3/4ths of all other full-time workers is earning about $66,000 per year, and would need about $52,800 annually in retirement.

Your circumstances or retirement dreams might make your income requirements different, but you can use this rule of thumb to estimate your annual retirement needs:

Estimate of Annual Amount You'll Need in Retirement = Your Expected Ending Salary x 0.80 Replacement

To find the government's best guess of your estimated future earnings, go to the Social Security quick calculator, and enter the requested information. On the results page, click "See the earnings we used" and look at the number for your last working year. Use this number in the formula above.

The 80% replacement rate is based on a few different assumptions. After you retire, you’ll likely pay less in income taxes and make no additional contributions to Social Security or your retirement savings. These costs currently consume about 20% of the average U.S. household budget.

Your general living expenses might also decrease once you retire. For example, you might spend less on gas because you’re not commuting to work; and you might lower your food costs because you’ll have more time to prepare meals at home rather than relying on takeout. However, many expenses will remain the same—or could even increase—as you age. These might include rent or mortgage payments, utilities and transportation costs.

Rising health expenses are a concern for everyone, but especially retirees. While every U.S. citizen (and legal resident for five years) over 65 years old qualifies for Medicare, you may have to pay premiums for this coverage and/or for supplemental coverage along with plan deductibles, copays and co-insurance.

How Much You'll Get From Social Security

Social Security is a significant source of income for most current retirees, and it could be very helpful for you too. Especially if,like 45% of working-age households in the U.S.,you haven’t set aside the first dollar for retirement. As long as you have worked and paid taxes in the U.S. (or your spouse has), you can count on receiving at least a little income from the Social Security system after you retire.

If you retired this year and you were a very high earner, pulling in more than $118,500 annually on average for 35 years, and you waited until age 70 to get your Social Security benefit, you could get the 2015 per-worker maximum of $3,501 per month.However, the current average monthly benefit for retired workers is $1,294.

The table below shows the expectable Social Security benefit, and income shortfall of 65-year-old retirees at various income levels in 2015.

Current Annual Earnings of 2015 Retirees, age 65

Monthly Income Needs at 80% of Former SalaryMonthly Social Security BenefitMonthly Shortfall















Social Security replaces some portion of your average income over your 35 best-earning years. That portion is about 40% of the current median income. The percentage is higher (though the total dollar amount lower) if you earn less; and vice versa, if you earn more.

It’s worth keeping an eye on your Social Security earnings during your working life so you can maximize your benefits in retirement.This might mean working a few extra years to boost your average income amount—especially if you left the workforce for awhile, perhaps to raise children or care for a sick family member. If you have earnings in fewer than 35 years, you will have zeros averaged into the calculation that determines your benefit. For each zero included in the 35-year earnings history of a typical worker retiring today, the monthly Social Security check will be lower by the equivalent of about $20 in today's dollars. If that person lives 30 years in retirement, that small monthly difference would add up to thousands of dollars.

You can also try to boost your Social Security benefits by taking a second job, seeking a raise from your current employer, or hopping to a job that pays better than your current one. And if you’re self-employed, it might mean not working quite so hard to maximize your business deductions, so you’re still paying a significant amount into the Social Security system through self-employment taxes.

Some worry that Social Security won’t be there when they retire, but it would take a lot for the country to decide to leave its retirees in the lurch. The system has been in place since 1937, and the U.S. government would have a hard time denying your claim after you did your part in contributing all these years. Also, since companies have been eliminating their pension plans, some are advocating to strengthen the Social Security system or implement other policies to help keep the elderly out of poverty.

Funding the Rest of Your Retirement Needs

To pay the remainder of your expenses in retirement, you can rely on a combination of pension payments—if you’re lucky enough to have those promised to you—and your own personal retirement savings. This can include amounts you've stashed in any 401(K), IRA, HSA, or other investment of savings account.

If you have no pension money coming your way, a simple calculation can help you figure out how much you’ll need to personally save up for retirement. Multiply your expected annual shortfall (your income requirements minus expected Social Security benefits) by 25.

Estimated Amount You Need to Save = (Future Income Requirement - Social Security Benefit) x 25

For example: You are a worker retiring this year at age 66 with the median income for workers that age: $45,916. You hope to live on 80% of your final income in retirement, about $36,733 per year. Social Security will send you $15,528 (nearly 42% of your needed income), so your shortfall is $21,205 per year. Multiply $21,205 by 25 to get to $530,125. This is the amount you should have saved. It would last you nearly 30 years, assuming a 4% annual withdrawal rate.

If you are many years from retirement, you can also use the Social Security quick calculator to estimate how much of your retirement income will come from that system. Choose to see your benefit estimate in "inflated [future] dollars" to keep your calculations consistent. Or get an estimate based on the table below.

The table provides some estimates of future nest eggs needed based on median salaries upon retirement at age 67 for workers who are currently 30 years old. It also reveals their projected savings needs after accounting for Social Security benefits (in inflated future dollars terms).

Current Earnings of 2052 retirees, (age 30 in 2015)

Est. Earnings in 2052Annual Income Needs at 80% of 2052 SalaryAnnual Social Security BenefitAnnual ShortfallSavings Needed

A current full-time worker earning a median salary would have to save about 10% of her income every year, for 45 years, and see her savings grow at 6% annually on average, to reach the amount she would need to fund her retirement at the levels suggested above. If she were able to save more each year, or get a higher rate of growth, she could reach her goal sooner.

A rule of thumb to help you save for retirement:

Amount You Should Save Each Year = Annual Income Before Taxes x 0.10

Of course, it’s easy to see how most or all of us would fall short of this ideal. Many workers have spells of unemployment over the course of their careers, or even years out of the workforce for caregiving or due to an illness or accident of their own. And not many are able to spare 10% of their income every single year to put in a retirement account. Then, there has been the challenge of growth in investments.

On the other hand, some of us have unusually lucrative years when we're able to sock away large amounts, which is especially beneficial to retirement savings if it happens when we're younger, because the money has so much time to grow.

Whatever your circumstances, try your best to get as close as possible to an adequate nest egg.

How Much to Save for Retirement

Online retirement calculators can help you assess your progress and show how much more you’ll need to save to reach your retirement goals. If you save early and save often, and make sure the money is in investments that grow over time, you stand a chance of assuring yourself a financially comfortable old age.

Kenny Zhu

Kenny is a Banking and Mortgage Research Analyst for ValuePenguin and has worked in the financial industry since 2013. Previously, Kenny was a Senior Investment Analyst at PFM Asset Management LLC. He holds a Bachelors of Science from Carnegie Mellon University, where he majored in International Relations & Politics. He is a CFA® charterholder.