Many people believe you need a million dollars to retire comfortably. That would be nice, but it's not necessarily true. Several factors affect the amount you'll need for retirement, and it may be less than you think. The goal is to have a retirement fund large enough to generate the income you'll need to support your future lifestyle in retirement.
Here are the factors that will affect the amount you need to set aside for retirement.
Consider also: Retirement: Benefits & Disadvantages
How Much Will You Spend?
You'll have two kinds of future living costs: needs and wants.
Your basic needs include housing, food, transportation and medical care with prescription drugs. You should look to cover these expenses with consistent sources of income, such as Social Security and pensions.
Wants or discretionary needs are activities you would like to do but are not essential, such as traveling, eating out and other forms of entertainment. These are the types of expenses you can adjust to live within the budget of your retirement income.
The general rule of thumb is that your expenses in retirement will be about 80 percent of your current living costs.
General Retirement Expenses
Your expenses in retirement could be less than the expenses for your current lifestyle. For example, will your mortgage be paid off? Will you still be making car payments every month?
What about health insurance premiums? Medicare kicks in at age 65, so you won't have a high monthly insurance premium. However, depending on your health concerns, you'll likely choose to add a Medicare supplement policy, but the premium for this type of insurance is much less than the premiums for a regular health insurance policy.
The general rule of thumb is that your expenses in retirement will be about 80 percent of your current living costs. If you're planning on downsizing to a smaller house since you no longer have dependents, your expenses might be less, but if you're planning to travel a lot, your expenses will be more.
Consider also: Can You Retire on Social Security Alone?
How Much Will You Need?
The lifestyle you want to have and when you plan to retire are two factors that will determine how much you need to save. If you're planning on working longer before you retire, you'll need to save less than if you are planning to retire earlier, say like age 62.
How long will you live? The general expectation is that most people will live about 25 years beyond their retirement age. Therefore, if you retire at age 67, you should plan on having enough in your retirement fund to take care of you until you're in the early 90s.
Consider also: Inflation & Your Retirement Savings Plan
Withdrawing From Savings Each Year
Data shows that Social Security benefits provide about 40 percent of the average person's retirement income. The average Social Security income is around $1,500 per month.
So, for example, if you project your living expenses in retirement at $3,500 per month, then you'll need to withdraw $2,000 per month from your retirement fund.
Studies using historical data have shown that if you start withdrawing 4 percent of your savings in the first year of retirement, then your retirement fund will last until you're in your 90s.
Therefore, if you need to withdraw $2,000 per month from your savings, you can find the amount you'll want in your retirement fund by dividing $24,000 ($2,000 times 12 months) by 0.04. This calculation shows that you'll need to have $600,000 put aside when you retire to cover your projected living expenses.