How Much Money Do You Need To Retire Comfortably?

Retirement is a dream time to relax, pursue passions, spend more time with family and friends and enjoy the fruits of your hard work. People are increasingly taking early retirement to enjoy more golden years. How much money do you need to retire comfortably? That depends on your lifestyle and retirement goals, but with the steps below, you should have a clear idea of your target.

What is a Comfortable Retirement?

A comfortable retirement and retirement goals vary by person. You might have a comfortable retirement with $50,000 per year, or you might need $200,000 per year. Your current spending habits and future goals will give you insight into what a comfortable retirement will look like for you.

Financially, a comfortable retirement is one in which your budget easily fits at or under the amount allocated from investment funds withdrawn. That means if you budget $50,000 per year for retirement, you must have a lifestyle that allows you to spend less than that without worrying about money.

How Do Retirement Savings Work?

Retirement savings or retirement accounts become the main source of retirement income for most people. This can include Social Security, pension plans, a 401(k) plan with your employer and tax-advantaged individual accounts like a traditional individual retirement account (IRA) or Roth IRA.

A 401(k) allows you to save pre-tax dollars on contributions. By the time the savings are needed for retirement, you'll pay less in taxes if you’re in a lower tax bracket. The same is true for a traditional IRA. You’ll pay taxes upfront with a Roth IRA, but the money will grow tax-free. 

The power of these retirement accounts is in long-term growth and compound interest. For maximum benefits, start investing in retirement accounts as soon as possible to maximize investment returns over time.

5 Steps for Retiring Comfortably and Early

To retire early and comfortably, you need to make a plan that maximizes employer-sponsored retirement plans and other tax-advantaged accounts. A comfortable retirement should also consider healthcare and inflation to create lasting financial comfort. Read on to learn how to get started.

Step 1: Retirement Planning

Retirement planning means understanding your income and expense needs in retirement and building resources to support those retirement goals. If your current budget is $5,000 per month, you’ll want to plan for a retirement of at least $60,000 per year unless you plan to significantly cut expenses.

A comfortable retirement means you have enough money in retirement accounts to withdraw to support your lifestyle, ideally without depleting the accounts. This will relieve a significant portion of financial worry in retirement.

To reach this goal, it is important to consider all possible sources of retirement income, including Social Security and employer-sponsored retirement plans, other investment accounts like IRAs or Roth IRAs and any other income like real estate income, royalties or annuities. 

Step 2: Employer-Sponsored Retirement Plans

Many companies offer employer-sponsored retirement plans as a benefit to employees, including 401(k)s, pensions or other retirement accounts. They are a great way to save for retirement because they often include employer contributions or matching, which means free money for your retirement savings. For example, many employers match 401(k) contributions up to a certain amount such as $15,000 per year. That means if you contribute $15,000, your employer will match it, and you’ll have $30,000 each year in contributions. 

Step 3: Healthcare Considerations

Considering healthcare costs in retirement is an important part of planning a comfortable retirement. With life expectancy on the rise, it is crucial to account for potential healthcare expenses that may arise and for basic healthcare expenses and insurance for 30 years or more. 

It’s important to account for health insurance in retirement. Medicare is federal health insurance for people 65 or older and covers medical care and drugs at providers across the U.S. within the Medicare network. 

Consider also managing healthcare costs with long-term care insurance. This type of insurance covers services not covered by regular health insurance, including assistance with routine daily activities at home, in an assisted living facility or nursing home. Choosing long-term care insurance will increase your retirement budget but will ensure you have the care you need. 

Factors that may impact healthcare and insurance costs include:

• Age
• Location
• Current health status

Ensuring you have adequate funds and insurance to deal with any health issues that come up is essential to securing a comfortable and stable retirement plan.

Step 4: Contribute to Retirement Accounts

How much money do you need to retire at age 50 or 60? Use the steps below to figure out what you’ll need to save. 

• Evaluate your current income and estimate the amount needed to maintain your desired standard of living in retirement. 
• Determine your employer's contribution limit toward retirement accounts, such as 401(k) or IRA. 
• Calculate the difference between the target figure and your employer's contribution.
• Divide the remaining amount by the working years left until retirement to get the required annual contribution. Divide that by 12 to get an estimated monthly contribution. 

If you don’t have an employer-match option, you’ll need to save the total amount and max out Roth IRA or traditional IRA contributions to save on taxes and earn more. Keep in mind that you can also set up ongoing sources of retirement income such as real estate property rental income or business income. 

Step 5: Hire a Financial Adviser

In many cases, to determine how much you'll need to save to retire comfortably, it's best to seek the advice of a financial professional. Retirement advisers and financial advisers are professionally trained to help you optimize tax-advantaged accounts and other retirement vehicles. 

How Much Should I Save for Retirement?

How much money you should put aside for retirement depends on your lifestyle and retirement goals. Each person’s needs for retirement vary by expected retirement age, sources of income and annual spending. The key is to break a big number into manageable pieces. 

Starting Retirement Calculation

Calculating contribution needs to achieve financial goals is as simple as multiplying your desired annual retirement budget by 25. That means if you want to have $50,000 per year in retirement, you’ll need at least $1.25 million. If you want a budget of $100,000, you’ll need at least $2.5 million. 

In this case, divide your target number by the years you plan to work. Then use a compound interest calculator with an interest rate of 7% to 10% (depending on how you invest) to determine how much you need to save each month. 

For example, if you want to save $1 million in 20 years, with 10% interest on investments, you’ll need to save at least $1,500 monthly. 

Retirement Savings by Age

Another option is to set targets by age. Experts give rough guidelines for retirement savings by age, such as saving three times your annual salary by age 40 and six times your annual salary by age 50. 

The 4% Rule

Other experts suggest the 4% rule, which assumes you’ll withdraw a static amount from your retirement accounts each year equal to 4% of the principal. The remaining interest earned remains in the account to compensate for inflation. By the 4% rule, for every $100,000 saved, you could withdraw $4,000. That means with $1 million, you could withdraw $40,000 the first year and the inflation-adjusted equivalent each year after. 

With the 4% rule, assuming you’re earning at least 7% on the principal annually, you will be able to compensate for inflation and retain the principal throughout your retirement to then pass on to heirs. 

How Much Money do you Need To Retire?

The general rule of thumb is that you should aim to replace 70% of your annual pre-retirement income, but this percentage should be reevaluated and adjusted based on retirement plans.

You may only need 70%, as monthly expenses and taxes may decrease, leading to a decreased necessary income. It is also important to factor in a sustainable withdrawal rate, investment returns, inflation, extra healthcare costs and contribution limits for retirement savings accounts.

Achieving Your Retirement Goals

The key to building a comfortable retirement is setting realistic budgets for a lifestyle you’ll enjoy where you don’t have to strain to maintain the budget. Be sure to leave a cushion for unexpected expenses. Then, set small weekly or monthly savings goals to take the first steps toward achieving your retirement dreams. 

As you build momentum, you may find additional income streams you can use to build a more comfortable retirement or to retire earlier.

Frequently Asked Questions