Most people know they need to save for retirement. The harder question is how much they actually need, and many people are not sure.
Surveys consistently show that retirement confidence varies widely. Many workers feel only somewhat confident they will have enough money to live comfortably, while others feel very confident. Retirees often report higher confidence than those still working.
Part of the challenge is that retirement looks different for everyone. Some people plan to travel frequently, dine out often, or maintain multiple homes. Others picture a quieter lifestyle, spending time with family, taking local trips, and keeping expenses low. The lifestyle you want will heavily influence how much you need to save.
Once you have a general vision for your retirement, you can estimate a savings target. There are a few common methods people use to calculate that number.
Calculating Your Needed Savings
Retirement advice can feel overwhelming because different experts use different rules of thumb. Some approaches focus on replacing your income, others focus on expected expenses, and others focus on saving a consistent percentage of your earnings over time.
The Income Method
This method assumes you will need a certain percentage of your pre-retirement income to maintain a similar standard of living in retirement.
A commonly cited estimate is that retirees may need around 70% to 80% of their pre-retirement income each year. For example, if a couple earns $60,000 annually before retirement, they may aim for roughly $42,000 to $48,000 per year after leaving work.
From there, subtract the income you expect to receive from sources such as Social Security, pensions, or other steady payments. Whatever is left is the amount you will need to withdraw from your retirement savings each year.
So, if that same couple expects $15,000 per year from Social Security and pension income, they may need about $27,000 to $33,000 per year from their savings.
A common guideline for retirement withdrawals is the 4% rule, which suggests withdrawing about 4% of your savings per year to help your money last through retirement.
Using that guideline, the couple would estimate their retirement savings goal like this:
- $27,000 ÷ 0.04 = $675,000
- $33,000 ÷ 0.04 = $825,000
That means they may need to save roughly $675,000 to $825,000 by retirement.
The Expenses Method
The income method takes a top-down approach, but the expenses method works from the bottom up.
Start by listing your expected retirement expenses, monthly or yearly, and total them up. Many retirees have lower expenses than they did while working, especially if they pay off major debts like credit cards, car loans, or a mortgage before retirement.
Once you know your estimated budget, follow the same basic process:
- Subtract Social Security, pension income, and other steady income sources.
- Take the remaining amount you need from savings each year.
- Divide that annual amount by 0.04, using the 4% guideline, to estimate your nest egg target.
This method can feel more realistic because it reflects your actual lifestyle rather than relying on income percentages.
The Savings Method
The savings method does not require you to estimate retirement spending. Instead, it focuses on consistently saving a percentage of your income over time.
Many experts recommend saving at least 10% of your gross income each year for retirement. Others suggest aiming closer to 20%, especially if you start saving later or want a more comfortable lifestyle.
If you start early, saving 10% may be enough to build strong retirement savings over the course of decades. If you start later, you may need a higher savings rate to catch up.
One benefit of this method is that the more you save, the less you spend, which can lower your lifestyle costs and make retirement more affordable when the time comes.
Points to Consider
Even if you calculate a target number, several real-life factors can change what you will need.
Your retirement age matters. Retiring earlier generally means you will need your savings to last longer. Working longer often improves retirement readiness by giving you more time to save and fewer years to fund your retirement.
Your health and healthcare costs matter. Healthcare can be one of the largest expenses in retirement, even with Medicare. If you have ongoing health conditions, you may need more savings to cover out-of-pocket costs.
Your goals matter. A luxury retirement costs more than a simple one. If your savings are behind, you may need to adjust your plans, focusing on comfort and stability first, and adding extras only if your finances allow.
Your ability to earn income does not have to end at retirement. Retirement does not always mean you stop working completely. Some retirees consult part-time, start small businesses, or take flexible work to stay active and bring in extra income.
Retirement planning is not simple, but knowing your target gives you direction. Once you understand what your retirement lifestyle may cost and how much income you will have coming in, you can take clear steps toward building the savings you need to retire with confidence.