Telling someone how much they need to save for retirement is tricky because everyone’s situation is different, which inevitably means they’ll require different amounts. Someone retiring in Los Angeles who plans to travel the world will likely need more than someone who wants to relax on a ranch in Montana. However, there are good baselines you can start at and then adjust accordingly to your retirement aspirations.
One common way to determine how much you’ll need in retirement is by first figuring out how much you’ll need annually using the 80% rule. The 80% rule says you should plan to have 80% of your annual income in retirement to maintain your current lifestyle. Given that rule of thumb, here’s how much annual retirement income someone should aim for based on their current income:
Annual Income
Target Annual Retirement Income
$50,000
$40,000
$80,000
$64,000
$100,000
$80,000
$150,000
$120,000
$200,000
$160,000
Data source: author calculations
The most important thing is adjusting the figures so they fit you. If you know you will downsize your retirement lifestyle, you can lower your needed percentage. If you know your retirement lifestyle will be an upgrade, you may want to add to the percentage to be on the safe side. For many people, even with an adjustment to the annual amount they’ll need in retirement, $1 million saved up will likely not be enough.
How much will you need in total?
The 80% baseline is good for figuring out how much you need annually in retirement, but it doesn’t quite tell you how much you’ll need in total. But have no fear, there’s a rule for that, too: The 4% rule. The 4% rule says retirees should plan to withdraw 4% of their savings annually, adjusting for inflation each year, without outliving their savings. Using the 4% rule, you would multiply your target annual retirement income by 25 to get your target total savings.
From our above example, here are the total target savings based on different incomes:
Annual Income
Target Retirement Income
Target Total Savings
$50,000
$40,000
$1 million
$80,000
$64,000
$1.6 million
$100,000
$80,000
$2 million
$150,000
$120,000
$3 million
$200,000
$160,000
$4 million
Data source: Author calculations.
If we’re following the guidelines of the 4% rule, $1 million in retirement savings would only be ideal for someone making $50,000 or less. For perspective, the median earnings of men and women who work full-time, year-round are $61,417 and $50,982, respectively, according to the latest U.S. Census.
Today’s environment may require adjustments
Since it was created in 1994, the 4% rule has been a great go-to for people looking to get an idea of their ideal total savings. But given today’s economic environment — such as inflation rates we haven’t seen in over four decades — retirees may be better off adjusting the 4% baseline closer to 3%. According to a recent Morningstar report, an initial withdrawal of 3.3% would give someone with a 50/50 stocks and bonds portfolio a 90% degree of certainty not to outlive their savings.
Traditionally, here’s how it would go: If you have $2 million saved for retirement, you would withdraw 4% the first year ($80,000). If inflation rose by 3% the next year, you would then withdraw $82,400. If it rose by 2% the following year, you would withdraw $84,048. While this method has worked in the past, with an 8.5% year-over-year inflation rate, increasing withdrawals by such a large percentage will increase the risk of a retiree running out of money.
To accommodate today’s conditions, retirees can either drastically decrease their spending or aim for higher savings to maintain their current lifestyle. The former is usually easier because cutting spending is more straightforward than finding extra money to earn and save. However, some people may find they have the means to save more for retirement and haven’t been doing so. Either way, what’s most important is that you’re flexible and able to adjust to the times. It may not be your ideal choice, but it beats outliving your retirement any day of the week.
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