Contributed by: Josh Bitel, CFP®
Retirement may seem far off, but knowing how much you need to save is a crucial first step toward financial security. The answer to "How much is enough?" isn't one-size-fits-all—it depends on your lifestyle expectations, health, location, and longevity. However, there are some "rules of thumb" that can help you put a pulse check on your retirement plan:
Start with the 80% Rule
A common rule is that you'll need about 70% to 80% of your pre-retirement income to maintain your lifestyle in retirement. For example, if you currently earn $100,000 annually, plan on needing around $70,000–$80,000 per year after you stop working. This accounts for lower expenses—such as commuting, work clothing, or mortgage payments—but you may spend more on healthcare or travel.
Use the 25x Rule
Once you have your annual income target, multiply it by 25 to estimate your total retirement savings goal. If you need $70,000 a year, that means you should aim for $1.75 million. This rule is based on the 4% withdrawal strategy, which assumes you can withdraw 4% of your retirement savings annually without running out of money for at least 30 years, a popular strategy for estimating the strength of a financial plan.
Factor in Other Income Sources
Remember to account for other income sources like Social Security, pensions, or rental income. If Social Security is expected to provide $20,000 a year, and you need $70,000, then your savings only need to cover the $50,000 gap—meaning a goal closer to $1.25 million instead of $1.75 million.
Adjust for Inflation and Healthcare Costs
Healthcare expenses tend to rise with age, and inflation steadily erodes purchasing power. It's wise to build a cushion by overestimating your needs rather than falling short. Consider using retirement calculators or working with a financial advisor to model different scenarios.
Start Early, Save Consistently
The earlier you begin saving, the more time your investments have to grow through compound interest. Even modest contributions can grow significantly over time. Don't worry though, it is never too late to get started! If you start later, increasing your savings rate or delaying retirement by a few years can make a big difference.
Ultimately, your retirement goal should reflect your unique vision for the future. Take time to define that vision, crunch the numbers, and revisit your plan regularly. Your future self will thank you. And, of course, don't hesitate to seek advice from a financial planner if you are curious about your retirement path.
Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Josh Bitel, CFP® and not necessarily those of Raymond James.
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