How much should I have saved for retirement?

Whether you're approaching retirement age or have just started saving, you might be wondering how much you should have socked away by the time you retire.

Unfortunately, no magic number works for everyone. But understanding what’s behind your retirement number — which varies based on your individual lifestyle choices, investment strategies, and personal goals — can help you prepare to enjoy your golden years without financial stress.

Why it’s important to save for retirement

If you plan to stop working once you hit retirement age, you'll need a financial safety net to help you maintain your standard of living. Your retirement savings are like acorns squirrels tuck away ahead of winter.

Because you'll likely be relying on savings later in life, the earlier you start to save, the better off you'll be. By saving for retirement early, your money will have more years to earn interest and grow, enhancing your sense of financial security and reducing the stress of having to save later in life. Some may advise you to save everything possible for retirement – since it never hurts to have a financial cushion if you encounter unexpected expenses. But over-saving may mean you can't enjoy other things or experiences earlier in life. Finding the right balance is the tricky part so you can spend for today and tomorrow.

Two phases to your retirement plan

When planning for retirement, it's important to consider two distinct phases: the accumulation phase and the spend-down phase. The accumulation phase is the time when you're actively saving for retirement, while the spend-down phase is when you're using the money you've saved in retirement. Understanding these two phases can help you develop a comprehensive retirement plan that incorporates your current financial situation and your future needs.

The accumulation phase

Several factors can influence your savings during the accumulation phase — and how much you’ll end up with by the time you reach retirement age. For example:

1. Your starting point: The earlier you begin to save for retirement, the better. If you’re starting with a nest egg, like an inheritance or a life insurance payout, you’re ahead of the game — but don’t worry if you’re starting from zero. You can still achieve adequate retirement savings on your own.
2. Your contribution levels: Regularly, significant contributions to your savings increase your potential end balance.
3. Your rate of return: The rate of return on your invested retirement savings can significantly impact your financial situation, especially over a long time frame. Higher-risk portfolios may offer better long-term growth, but you'll have to balance the risk with your comfort level. Many people have good savings habits, but are not investing appropriately for their goals, such as retirement. It’s critical to understand the difference between saving and investing.
4. Your retirement needs: Are you saving just for yourself or for you and a spouse? What about any dependents, or do you want to leave a legacy for a family member? The more people you’re planning for, the more money you’ll generally need.

The spend-down phase.

Once you reach retirement age (usually around age 65 for most), how much you will need to live on through retirement — or the rest of your life — will depend on factors like:

1. Your starting amount at retirement: How much could you save before you retire? Chances are you’ll be over or under what you planned for, but this is what you’ll have to work with in retirement.
   
2. Legacy desires: If you want to leave a legacy or inheritance for someone else or use your retirement savings to help provide for a spouse, it can affect how much you’ll have for your retirement lifestyle. Interestingly, a recent study found that only some retirees are willing to cut back on their retirement lifestyle so they can leave a legacy or inheritance. See Note ‍ ‍^a
   
   Note a. 2024 Retirement Confidence Survey, EBRI, Greenwald Research, https://www.ebri.org/docs/default-source/rcs/2024-rcs/2024-rcs-release-report.pdf Opens in a New Window,‍ ‍ ^{See note 1} (accessed October 17, 2024).
   
   
3. Your income needs: How much will you regularly need to withdraw‍ ‍ ^{See note 2} from your retirement investments? It’s crucial to balance your lifestyle costs and needs with the money you’ve saved, plus any other income sources like Social Security.
   
4. Longevity: Longevity can be a blessing — if you have the savings to support yourself for the rest of your life. What is your estimated life expectancy, and are you planning for you and another person, like a spouse? It will depend on your health, but your medical needs and overall health can significantly impact your financial planning.

Predicting your lifetime needs

Our retirement spending level and how long we’ll live are the primary drivers of how much we’ll need to save for retirement. Therefore, given their importance in the retirement savings calculation, let’s take a closer look at these factors.

How much will you spend in retirement?

According to the U.S. Bureau of Labor Statistics, housing, food, transportation, and health care account for 72% of the budget for most people 55 and older. That doesn’t leave much money for everything else.

Will your spending increase, decrease, or stay relatively constant as you age? Several studies indicate that when accounting for inflation, most people spend less over time as they grow older than 65, whether single or married. Expenses also go down due to a "widowing" effect when spouses or partners die. According to a recent study, spending tends to decline in retirement no matter how much money you've saved. That makes sense if you consider our lifestyles as we age: Generally, most people slow down as they get older and may be unable to do expensive things like travel. Many financial professionals refer to the three stages of retirement:

• The “go-go” years, usually ages 60 to 70, when retirees are most active.
• The "slow-go" years are typically when people hit 80 and start slowing down.
• The "no-go" years, ages 90 and above, are when extra expenses dwindle because we aren't very active.

How long will you live?

Life is complicated, and it’s not always fair. Longevity can be hard to predict. Who knows what medical needs you'll have in 30 or 40 years? However, to a degree, we can make some reasonable assumptions about our future health based on our family histories and individual situations.

The following chart demonstrates the odds of a married couple living at various ages. In this case, Leo and Mona are both 65 and retired. We are interested in knowing the odds of one of them, either of them, or both of them living to ages 75, 85, or 95, depending on their health status: poor, average, or excellent.

Probability of a 65 year-old living to different ages, depending on health

Source: American Academy of Actuaries and Society of Actuaries, Actuaries Longevity Illustrator, http://www.longevityillustrator.org/ Opens in a New Window,‍ ‍ ^{See note 1} (accessed April 24, 2024).

In the chart above, we can see that if Leo and Mona are both in excellent health, there is a good chance – 47%, that at least one of them will live to age 95. The bottom line is that the better your health, the longer you may live, all else being equal. In addition, your planning should account for the probability of at least one person surviving to an older age. Although your longevity will vary from the average, making an educated assumption for retirement planning is still essential.

How to estimate your retirement number

The farther away from retirement you are, the good news is that time is on your side to save and invest toward your retirement goal. The not-so-good news is that so many things can change over a long time horizon that can make planning a bit trickier. Once you are closer to retirement, you'll probably need to start fine-tuning your calculations. Nevertheless, here are a few common methods for estimating your retirement number.

If retirement is far off

• Guestimate. A recent survey by a major insurance company states that respondents think they will need nearly $1.5 million to retire comfortably. There's no math behind this; it's just what people think. In addition, this number can be higher or lower depending on the age group asked this question.
• Multiple of most recent earnings. If you're farther from retirement, the multiple of final earnings method is a famous rough calculation. With this method, you assume you must replace about 70% to 85% of your final salary. So, you simply multiply your estimated or known final gross salary by 10 to 12 to arrive at an estimate. If your final salary is $80,000, this method states you would typically need about $800,000 to $960,000 to get by in retirement.
• Estimating your number using the 4% withdrawal rate “rule of thumb.” The 4% "rule of thumb" was devised in 1994 by financial planner William Bengen and has been reviewed in numerous subsequent studies, such as the "Trinity Study, Retirement Withdrawal Rates and the Chance for Success, Updated Through 2009." This method provides a starting annual withdrawal rate you could take from your retirement accounts with a low risk of running out of money during a 30-year time horizon, assuming an allocation of 50% stocks and 50% bonds. Instead of using your salary as a starting point, this method looks at your withdrawals from your investment portfolio. For example, assume your essential retirement lifestyle expenses are $60,000 annually, and your Social Security and small pension equal $40,000. In this case, your expense gap is $20,000 per year, and the amount you'll need to fund from your retirement savings. Divide the gap of $20,000 by 0.04, and the result is $500,000, which is the amount you would need at the start of retirement, according to the 4% withdrawal rate rule of thumb. The assumption is that you could take $20,000 from your $500,000 portfolio and then increase the starting withdrawal by inflation each subsequent year with a high probability of not running out of money.

As you get closer to retirement

It's wise to start fine-tuning your retirement number once you're approaching retirement – maybe 10 to 15 years away. By now, you should probably have more clarity regarding your expenses and longevity to help you arrive at a more precise number. As you get closer to retirement, you should use an actual budget, factoring in how some major expenses may change once retired, such as housing costs, medical expenses, transportation, no longer saving for retirement, and no longer paying payroll taxes. You can still use some of the previously discussed methods to validate your retirement number, and here are a few additional methods.

• Immediate annuity method. People buy single premium immediate annuities, or SPIAs, to generate a retirement income stream they can't outlive. However, you can also use the SPIA calculation to estimate your retirement savings. Using the same previous example where our retiree estimates they'll need about $20,000 per year to get by (the gap for expenses not already covered by Social Security or pensions) you can have an insurance company estimate of how much you would need to start with to provide that income for the rest of your life, or joint lives. For example, Carlos and Eva, aged 65, think they’ll need about $20,000 per year as long as one is still alive. They can use a calculator to do the math, like USAA’s single premium immediate annuity calculator. To receive $20,000 per year, or $1,667 per month, Carlos and Eva would need a lump sum of about $300,000. You may notice that this number is significantly lower than some of the other estimates, which is due to the nature of how annuities work. The insurance company is taking on the risk of you not running out of money, and in return, you forfeit the $300,000 principal.
• Your personalized retirement plan. At this stage in life, you want to rely on something other than rules of thumb and guesswork regarding retirement. That's why you'd be wise to involve a professional with the proper tools available to help you verify your retirement income needs and closer validation of your retirement number. Many good sources are available to help you, including USAA’s Retirement Income Team. Your retirement plan should use more precise assumptions regarding longevity, spending levels across retirement, rate of return on your investments, and inflation rate. It may also include a cushion for unexpected health-related or non-standard expenses.

Conclusion

• Focus on retirement income and expenses to help you determine how much you’ll need in retirement.
• Start planning now and consult professionals as needed, especially as you get closer to retirement.