How Much Will You Need to Retire
Photo by Laura Ohlman on Unsplash
Whether it’s spending your time with family and friends, traveling and exploring new countries and cities, or dedicating more time to pursue hobbies that you otherwise couldn’t because of work obligations, retiring for many means leaving your job to do whatever you want without the worry of where your next paycheck is coming from. In order for us to retire, we need to save money and invest it so that our “future selves” can live off of our savings without having to work.
In this article, I’m going to cover approximately how much money you will need to retire based on different expense levels.
Here’s how this article is broken down
- Calculating how much you will need.
- How much will you need to have saved at each age?
- 5 Tips to achieving your goal
Calculating how much you will need
The first step in calculating how much you’ll need for retirement is figuring out how much you’ll be spending every month in the future. We can approximate this using our current spending and then applying inflation. Because inflation causes the value of a single dollar to be worth less next year than it is today, we will need more money in the future to maintain our standard of living. If you’re 21 years old today and your monthly expenses (not including debt repayments) grew at 2% a year, here’s what your budget would roughly be when you turn 65.
| Monthly Budget | At age 21 (2021) | At Age 65 (2065) |
| $3000 / month | $3000 / month | $7,170 / month |
| $4000 / month | $4000 / month | $9,751 / month |
| $5000 / month | $5000 / month | $11,950 / month |
| $6000 / month | $6000 / month | $14,627 / month |
| $7000 / month | $7000 / month | $16,730 / month |
| $8000 / month | $8000 / month | $19,120 / month |
| $10000 / month | $10000 / month | $23,901 / month |
Your expenses may vary depending on several factors, such as paying off your house or continuing to rent, so to be conservative let’s assume your expenses stayed. This means that a 21-year-old whose non-debt expenses are $5000 per month today could expect expenses of around $11,950 per month at age 65. These numbers may seem unrealistic, but keep in mind that a loaf of bread only cost a nickel in the 1930s. Likewise, 4 years of college tuition cost less than $2000 in the 1970s. Fortunately, in most cases, our incomes will also rise to account for inflation.
Based on our expenses at age 65, we need to save enough to withdraw from our savings at a safe for the next 30 years (until we’re 95) without running out. I’ve used safe withdrawal rates between 3.5% and 4%: 3.5% if we’re being conservative about how much we need or 4% if we expect lower expenses and higher low-risk returns in the future.
As we withdraw 3.5%-4% every year from 65 to 95, our retirement savings will grow by only 2-3% because we will invest the majority of our assets (~80%) in less risky assets, such as treasury or municipal bonds, approaching and during retirement.
In this case, I’ll use 3.75% as the withdrawal rate. We also add social security payouts starting at the age of 70. Based on these assumptions here’s approximately what one would need at 65 to pay for expenses up until they’re 95 years old.
| Monthly Budget At Age 21 (2021) | Monthly Budget At Age 65 (2065) | Yearly Budget At Age 65 | How Much Needed to Retire |
| $3000 / month | $7,170 / month | $86,042 | $2,294,451 |
| $4000 / month | $9,751 / month | $114,723 | $3,059,268 |
| $5000 / month | $11,950 / month | $143,403 | $3,824,085 |
| $6000 / month | $14,627 / month | $172,084 | $4,588,902 |
| $7000 / month | $16,730 / month | $200,764 | $5,353,719 |
| $8000 / month | $19,120 / month | $229,445 | $6,118,536 |
| $10000 / month | $23,901 / month | $286,806 | $7,648,170 |
How much will you need to have saved at each age?
Based on the “How Much Needed to Retire” number calculated above, we can back-track that to get how much we should have in savings at certain ages between 21 and 65.
| Age | Goals for $3000 / month | Goals for $4000 / month | Goals for $5000 / month |
| 25 | $50,000 | $70,000 | $80,000 |
| 30 | $80,000 | $110,000 | $140,000 |
| 35 | $130,000 | $180,000 | $220,000 |
| 40 | $210,000 | $280,000 | $350,000 |
| 45 | $340,000 | $450,000 | $570,000 |
| 50 | $550,000 | $730,000 | $920,000 |
| 55 | $880,000 | $1,180,000 | $1,470,000 |
| 60 | $1,420,000 | $1,900,000 | $2,370,000 |
| 65 | $2,290,000 | $3,060,000 | $3,820,000 |
| Age | Goals for $6000 / month | Goals for $7000 / month | Goals for $8000 / month | Goals for $10000 / month |
| 25 | $100,000 | $120,000 | $140,000 | $170,000 |
| 30 | $160,000 | $190,000 | $220,000 | $270,000 |
| 35 | $260,000 | $310,000 | $350,000 | $440,000 |
| 40 | $420,000 | $490,000 | $560,000 | $710,000 |
| 45 | $680,000 | $800,000 | $910,000 | $1,140,000 |
| 50 | $1,100,000 | $1,280,000 | $1,460,000 | $1,830,000 |
| 55 | $1,770,000 | $2,060,000 | $2,360,000 | $2,950,000 |
| 60 | $2,850,000 | $3,320,000 | $3,800,000 | $4,750,000 |
| 65 | $4,590,000 | $5,350,000 | $6,120,000 | $7,650,000 |
We may hit goals faster than expected during years of exceptional market returns (surprisingly, such as 2020), and we may have years when we miss goals due to poor market returns.
5 Tips to achieving your goals
Contribute to your 401K
If your employer offers you a 401K you should definitely contribute to it. A 401K is an automatic way to save money for retirement every month. I highly recommend utilizing a Roth 401K if you have the option; this will let you withdraw your gains at retirement without paying taxes. Here’s a quick example of how much you would have if you maxed out your 401K contribution every year until you turned 65. I’m assuming a $19,500 yearly contribution limit and a 10% average return per year until 50, then a 5% rate of return from 50 to 65.
| Age | 401K Maxed Contribution w/ 10% Return |
| 21 | $19,500.00 |
| 25 | $120,000 |
| 30 | $310,000 |
| 35 | $620,000 |
| 40 | $1,100,000 |
| 45 | $1,900,000 |
| 50 | $3,200,000 |
| 55 | $4,400,000 |
| 60 | $5,700,000 |
| 65 | $7,035,000 |
Finish paying off your house
If we can knock out big expenses, such as housing, our retirement expenses will be lower. If we keep renting forever, the price we pay for rent will continue to increase due to inflation, however, if we eventually own our own home, we won’t have to worry about paying anyone for housing when we retire. The amounts listed above for specific budgets assume that you will have to worry about housing expenses even after retirement. If we eliminate housing expenses, our post-retirement expenses will be much lower and you may not need as much.
Look into an IRA – small savings add up
If your employer doesn’t offer a 401K, you can still contribute to a Roth IRA (Individual Retirement Savings Account). The contribution limit is $6000 per year, but even saving this amount every year will compound to a large nest egg in your future. With a 10% a year return rate, even saving $200 a month at the age of 21 will leave you with $1.5 million by the age of 65.
Take time to plan
Everyone’s situation is unique, therefore, the best way to figure out how much you need to save for retirement is to plan out your future expenses. This may sound tedious and time-consuming, but it’s well worth the effort. Even a little planning can go a long way in understanding how much you will need. If you think you can’t make these goals now, you have a lot of time to adjust; for example, you can plan on moving to a lower cost of living when you retire. I personally recommend Fidelity’s Planning tool since it automates a lot of the calculations and accounts for inflation.
Don’t worry
The task of planning for retirement at such a young age may seem unnecessary, daunting, or confusing, but know that you don’t have to have everything figured out now; just take it step-by-step. Maybe every month you spend 30 minutes going over expenses or figuring out how much you can save each month for an IRA. From firsthand experience, planning, even a little at a time, has reduced my worries about the future and has made me feel more secure. Even if the future is still unknown, it’s best to have a roadmap.