How Much Do I Need to Retire?

Planning Ahead

When it comes down to it one of the most important aspects of managing your personal finances is planning ahead for retirement. Some experts have suggested that it’s necessary to save up as much as $1 million in your 401(k) in order to retire at 65, which would require saving about $250 every month for 40 years if you start saving at the age of 25. What’s tragic is that it’s been estimated that 42% of those between 18 – 29 have nothing saved at all, and that on average 1 out of every 4 Americans has nothing saved for retirement. The predicament is even more discouraging when you recognize that those that have been able to save money have very likely not saved enough. Even those that have put away as much as $120K would expect to have to live on a budget of only $1000 per month, which in many places in the US is essentially impossible, even in the less expensive areas that would present a challenge. This is especially challenging when you consider that the cost of living will very likely be even higher in the future than it is now.

This is why it is so important to begin saving as soon as possible, and as much as possible. So that being said, many readers would be asking, ‘How much do I need to retire?’ Well, this is dependent upon a couple of different factors, namely your location, what lifestyle you would like to live while in retirement, how much income you have, and how long you expect to live.

Where to Start

Let’s start with lifestyle and longevity expectations. Broadly speaking, in order to maintain a similar lifestyle to what you have before retirement (and as long as you are reasonably healthy and have paid off your mortgage), you will need about 70% of your pre-retirement salary. Based on that rudimentary calculation, if you earn $70K/year at age 65 when you retire, and if you expect to live until roughly 85, you will need approximately $980K saved in retirement. But again, this is only a very simple approximation, not the rule. These numbers can be tweaked very easily. If you plan on living a little more simply and get really good at pinching pennies, you may be able to go down to as low as $750K and probably do fine. And not to be grim, but if you don’t think you’ll live that long then you will also not need as much saved up.

Location is a really big component of how long you’ll be able to live comfortably in retirement. Some areas of the United States are incredibly expensive, such as San Francisco, Seattle, and New York. And it’s safe to assume it’s just going to become more and more expensive as time goes on. What may make the most sense for a lot of people that live in areas like this, is that when it comes time to retire it may be best to sell the house and then move to a much cheaper city, or state (or even move to a different country) and rent an apartment or move into a 55+ housing community.

The realities of personal finance often make it much more practical to rely upon a professional to guide and advise you on making smart long-term financial decisions. If you’d like help or have questions about what you should do, consider reaching out to Texas Republic Bank and asking them about starting an IRA.