May 13, 2022

How Much Do I Really Need in Retirement?

Eric Bank
Former Citadel Director of Business Analysis

If you’re starting to research the money you’ll need in retirement, you may have encountered articles telling you to sock away $2 million by age 65. 

Makes you want to jump off a bridge? 

Hold on! That advice is flawed because your income is paramount, not your savings. I’m not saying that savings aren’t necessary. But they are just part of the picture, and it’s a picture that varies from one person to the next. Let’s take a more realistic look at what it will take to retire comfortably.

Rules of Thumb

Several quick and dirty formulas give you general guidelines for retirement income. 

The 80% Rule says that you need 80% of your preretirement annual income to maintain your lifestyle. According to the rule, if you earned $80,000/year before retirement, you’ll need a yearly income of $64,000 ($5,333/month) after retirement, adjusted for inflation.

The 4% Rule advises you to distribute 4% of your retirement savings each year. If you’ve been able to save $300,000, the rule has you withdrawing $12,000/year. It also assumes you earn 5%/year on your nest egg and that you’ll live for another 30 years after retiring.

So if you lived on savings alone, you’d need $1.6 million squirreled away to finance your $64,000 annual income. Thankfully, you don’t need to depend on savings alone, and you have options that can reduce your income needs.

Factors Affecting Your Retirement Needs

At the top of the list is Social Security. According to the Social Security Administration, the average monthly retirement benefit as of March 2022 is $1,618.29 per worker. Non-working spouses of retired workers receive another $838.41, but working spouses collect their own full benefits. You can claim benefits starting at age 62.

But you can receive quite a bit more if you delay claiming your benefit. For example, you can receive up to $4,194 per month if you file your claim in 2022 at age 70. That’s 32% higher than if you claimed your benefit at age 66. Your decision for when to file for Social Security benefits should consider:

  • Your other sources of income
  • Your longevity and health
  • Your lifestyle
  • Separating emotional needs from financial
  • Understanding the Social Security benefit numbers

Beyond Social Security, you may have retirement savings in a 401(k), IRA, annuity, and/or pension. You can withdraw money penalty-free after age 62 ½ and must begin taking required minimum distributions (RMDs) at age 72, with two exceptions:

  • You can delay 401(k) RMDs while you still are an employee of the company sponsoring your plan
  • Roth IRAs do not impose RMDs upon their owners

Another factor is that the internet has enabled many seniors to continue working, often well into their 70s (or beyond). The extra earnings from even part-time work can go a long way toward meeting your monthly income goal. 

You also control your lifestyle, allowing you to downsize, relocate, and take other steps to cut your income requirements.

The Best Answer

The best answer to how much you’ll need for retirement depends on your unique circumstances. Several high-quality retirement calculators are available on the internet that will allow you to get an accurate answer. You can vary your assumptions to see how they affect the outcome.

You can also work with a financial advisor. These professionals have the expertise and tools to help you understand your options, including ways to minimize your tax bill in retirement. The sooner you start, the better your chances for a comfortable retirement.

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