How Much Should You Save by Retirement?

The question of how much money one should have saved by retirement has no universal answer. Rules of thumb can provide a rough benchmark, but they rarely account for differences in lifestyle expectations, geographic location, health, and the structure of household income. The right figure for you is best determined through a structured evaluation of your projected expenses, reliable income sources, and the number of years your assets must sustain you.

Assessing Your Expected Expenses

The first step in identifying a realistic savings target is to estimate your annual expenses in retirement. This should include fixed costs such as housing, insurance premiums, and taxes, as well as variable costs like travel, hobbies, and discretionary spending. Health care often requires special attention, as medical expenses tend to rise with age and can vary considerably depending on personal circumstances and Medicare coverage choices.

Factoring in Reliable Income Sources

Social Security, pensions, and annuities can reduce the amount you need to draw from personal savings each year. For example, a household expecting $40,000 in annual combined Social Security benefits will require a smaller withdrawal from investment accounts to cover the same standard of living than a household relying solely on portfolio income. Identifying these predictable income streams allows you to focus your savings target on the actual shortfall.

Determining a Sustainable Withdrawal Rate

A widely referenced guideline suggests withdrawing no more than four percent of your portfolio annually in retirement to reduce the risk of depleting assets too quickly. While this “4% rule” can be a useful starting point, it should be adjusted based on market conditions, your desired legacy goals, and your ability to reduce spending in adverse markets. More conservative withdrawal rates may be prudent for those retiring early or with a higher tolerance for market volatility.

Accounting for Inflation and Longevity

Inflation steadily erodes purchasing power, making it essential to build a retirement portfolio that grows over time. Similarly, longer life expectancies increase the number of years your savings must provide income. It is not uncommon for retirements to last 25 to 30 years, and some will last longer. Incorporating realistic assumptions for both inflation and longevity ensures your savings plan has the resilience to meet extended needs.

Building a Personalized Framework

Rather than focusing on a single “magic number,” approach your savings target as a range informed by your spending, income, and risk tolerance. Regularly update these projections as circumstances change, particularly when approaching retirement age. This approach not only makes the goal more accurate but also allows for adjustments to savings rates or investment strategies while there is still time to act.

Professional Guidance for Precision

Determining your retirement savings target involves more than simply multiplying your income by an arbitrary figure. It is a calculation that benefits from professional input, access to robust planning tools, and knowledge of the tax implications tied to different withdrawal strategies. The more you know, the better geared you'll be for figuring what you and your spouse need for living your best and happiest life in retirement.