How Much Money Do You Need to Retire: Are you on track?

The Logic of Money

The Logic of Money

JANUARY 1, 2020

When it comes to retirement planning, you need to work backward. The first thing you need to establish is how much money you think you will need to live comfortably in retirement. 

Many experts estimate that you will need to replace 80 percent of your current income annually in retirement to continue living a comfortable lifestyle. This is likely because while you are working, those same experts tell you that you should be saving 20 percent of your income.

The problem with this blanket advice is that 80% of your income is different for every person. A single 24 year old that just graduated from college and is making $50,000 a year is completely different than the 55 year old married individual making $200,000 a year supporting their family on one income.

We understand the topic of retirement planning can be confusing so we break it all down for you below. After reading through our guide, you will have an understanding of what it takes to retire comfortably at any age and you will be able to put a plan in place that works for you and your family.

Key Takeaways

  • According to a study by Charles Schwab, Americans need $1.7 million to retire comfortably
  • Majority of Americans are not saving enough money for retirement and are behind where they should be for their age
  • Use the 4 percent rule to calculate how much you need to save for retirement
  • Shift your mindset to investing for retirement rather than saving for retirement

Retirement Planning Statistics

According to a study of 1,000 401(k) participants across the nation by Charles Schwab, the magic number for most Americans to retire is $1.7 million. 

However, the majority of people won’t ever reach that number. 

Take a look at some other statistics from the Charles Schwab study:

51
percent

of those surveyed are contributing less than 10% of their income to retirement savings

33
percent

of those surveyed have never increased their contribution percentage


26
percent

of participants have taken a loan from their 401(k) 

(please don't ever do this)


$8,788
dollars

is the average annual contribution to retirement savings of those polled


Here is the median retirement savings by age from Transamerica Center for Retirement Studies. Where do you stack up?

Americans in their 20s:

$16,000

Americans in their 30s:

$45,000

Americans in their 40s:

$63,000

Americans in their 50s:

$117,000

Americans in their 60s:

$172,000

Remember earlier, when we talked about the magic number to retire comfortably was $1.7 million for most Americans? People in their 60s are pretty far off from that number. Do you see the issue now?

How to Plan For Retirement: Using the 4 Percent Rule (Rule of 25)

The most popular and easiest way to estimate how much you will need to save for retirement is by using the 4 percent rule or rule of 25. This rule provides you with an estimate for how much you will be able to live off of each year or an estimate for how much you will need to save to live comfortably in retirement.

If you currently have (or are projecting to have) $1.5 million when you retire, you can divide that amount by 25 (assuming you will have 25 years in retirement) to estimate that you will be able to withdraw $60,000 per year.

If you want to be able to withdraw $60,000 per year in retirement, you can divide that amount by 4 percent to estimate that you will need at least $1.5 million to retire comfortably for 25 years.

Try out these calculators to help you plan for your retirement:

The 4 Percent Rule

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The Rule of 25

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1

Estimate How Much Money You Want to Be Able to Withdraw Annually

This is the first and most important step to establishing a plan for retirement. If you don’t make an estimate of how much money you will need to live the lifestyle you are planning to in retirement, the rest doesn't matter. Make sure to factor things such as vacations, grand kids, charitable donations, etc.

2

Divide The Amount by 4 Percent

Once you establish how much you will need to live off of annually, you need to divide that amount by 4 percent. Doing this assumes that you will withdraw 4 percent annually from your retirement nest egg. This also assumes that you will have 25 years of retirement (4 percent x 25 years = 100 percent of retirement savings).

3

Analyze Your Current Retirement Savings

Now that you have established how big of a nest egg  you will need to have in retirement, it is time to look at your current retirement savings. Do you have any employer sponsored or individual retirement accounts? Take a look and add up everything you have saved for your golden years.

4

Calculate How Much You Need to Save Monthly

The last step is to calculate how much you will need to start contributing to your retirement accounts in order to achieve your financial goals. This part may either scare you or give you some comfort depending on how early and how much you started saving.

Download our FREE retirement planning cheat sheet here:

Saving For Retirement vs. Investing for Retirement

You might be asking yourself, what’s the difference? 

The answer: Hundreds of thousands of dollars

When you read an article or a financial advisor tells you that you should be saving 10% or 15% or 20% of your income, what they really mean is that you should be investing that amount, not saving. 

The fastest way to financial freedom is by making your money work for you. Savings accounts don’t necessarily do that for you.

Take a look at this example:

Savings Account

  • Monthly Savings: $500
  • Savings Account Annual Interest: 0.5%
  • Years Until Retirement: 30 years

Amount Saved at Retirement: $194,158

Investment Account

  • Monthly Savings: $500
  • Savings Account Annual Interest: 6.0%
  • Years Until Retirement: 30 years

Amount Saved at Retirement: $502,258

According to the study done by Charles Schwab, over two-thirds of those surveyed viewed themselves as savers rather than investors. 

Simply shifting your mindset to being an investor rather than a saver could make all the difference in meeting your retirement goals.

Best Advice for Saving for Retirement

Saving for retirement shouldn’t be overly complicated. There are a few best practices to keep in mind that can help you reach your goals faster and make your retirement planning a piece of cake.

1.

Start Saving As Early As Possible

The easiest way to reach your retirement goals is to start early. Ideally, everyone would start saving for retirement as soon as they have an income stream. Unfortunately, this is not always the case. Most people don’t start saving and investing for retirement until their mid-20s or later.


Think about your retirement as a cost for a second. The later you start contributing money toward your retirement, the more it is going to cost you. You are going to have to put aside far more money in order to achieve the same results than if you had started putting money aside years earlier. This is because the longer your money sits in investments, the more the interest you are earning can work for you. 

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.”

Albert Einstein

2.

Save 10-15% of Your Income

This is the bare minimum you should be saving for retirement. Most experts agree that if you start saving 10-15 percent of your income early on in your 20s, you should be pretty well set for retirement in your late 60s. However, if you want to retire earlier than your late 60s, you should be putting 20 percent or more into your savings.


This also goes hand in hand with the first piece of advice. According to Charles Schwab, if you don’t start saving for retirement until your mid 40s, you might need to put at least 35 percent of your income into a retirement account to make up for it.

3.

Make Sure to Choose Low-Cost Investments

One of the most important things to consider when allocating your money to investments is expense ratios and commissions. Investing is the quickest and most proven way to reaching your retirement goals, however, choosing mutual funds and exchange traded funds with high expense ratios or commissions can kill your returns.


A difference of 1 percent or less in expense ratios between different funds could be the difference of thousands or hundreds of thousands of dollars in the long run. Make sure you check the fees associated with each investment before throwing your money into it.


Try to avoid investments with front-end or back-end loads and 12b-1 fees. There are plenty of quality investments out there that do not charge these fees and still offer attractive returns.

4.

Only Invest in Things You Understand

This is a piece of advice from Warren Buffett - one of the world’s most well known investors. If Warren Buffett is telling you that he follows this piece of advice, you’d be crazy not to follow it too.


Buffett is referring to companies when he makes this statement, but it applies to all parts of investing. If you do not understand what a mutual fund or an exchange traded fund is or are not understanding the expenses or commissions associated with each, don’t put your money in it. Park your money in a high yield savings account until you can do more research and educate yourself on these investment vehicles.


The same applies to companies. If you don’t understand what a company does, don’t just throw your money in it because someone else told you to do it. If you truly understand what a company does, then you can decide for yourself if you think the company has value over the next 10-20 years.


These are the two criteria Buffett uses to make his investment decisions and you might want to consider taking these to heart as well.

5.

The Ideal Holding Period is Forever

Another great piece of advice from Buffett is that if you’re not comfortable holding an investment for 10 years, you shouldn’t hold the investment for 10 minutes. Buffett says his favorite holding period for an investment is forever.


You need to be able to ignore the noise and have the stomach for a sudden drop in your investments value. Your portfolio will fluctuate up and it will fluctuate down, but you need to have the mental and emotional strength to not buy and sell whenever something happens.


The best way to build wealth is to let your investments do their thing over the long haul. Trying to time the market is a losing game and unless you have psychic powers, I’m betting on the market winning every time.

6.

Take Advantage of Your Company Match

If your company offers a match in your retirement plan, you should always contribute at least up to that amount. Not doing this is like throwing away free money. 


If you make $60,000 a year and your company offers a 5 percent match, contributing at least 5 percent of your income will give you a bonus of $3,000 from your company’s match.


Over the long haul, this will have a huge impact on your retirement savings. Don’t waste your company’s match if they offer it. It is free money!

7.

Retire In a State With a Low Cost of Living

The last tip is to retire in a state that is friendly to retirees.  This goes for cost of living and for taxes.

Choosing a state that has a low cost of living can make your retirement savings stretch even further.


Depending on where you choose to retire, you may be able to live a more lavish lifestyle than you had anticipated because things will simply just cost less than where you currently live. The biggest expense to watch out for is housing.


Additionally, there are some states that do not have state income taxes such as Florida, Tennessee, South Dakota, Wyoming, Texas, Nevada, and Washington. 


Most states also won’t tax social security. Make sure you check out all expenses and all taxes before you pick up and move to another state.

Social Security: Can You Rely On It?

“The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood. Currently, the Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits. This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman.”

I don’t know about you, but I wouldn’t be counting on social security being a source of income in retirement. The program is vastly underfunded as the Social Security Office states above. 

By 2035, only 75 percent of benefits will be able to be paid out because birth rates have declined. They state that the issue is not because we are living longer, but that is another thing to consider.

Currently millennials are having less kids, and waiting longer to have kids because the cost of raising a kid have drastically increased. If Americans are living longer, having less kids, and having kids later - meaning their kids won’t start contributing until social security until later - then either 1 of 2 things can happen. Either people will need to work longer and retire at a higher age than they currently do, or social security will continue its downward trend.

The safest bet is to assume you won’t receive any social security benefits in retirement and only rely on yourself. If social security makes a drastic comeback and they find a way to fully fund everyone’s social security benefits, then that’s just icing on the cake if you have already set yourself up for success.

Planning For Retirement: An Example

Many experts recommend that you plan on withdrawing at least 80% of your income at retirement if you plan to continue living the same lifestyle. 

So, if your household income is $100,000, the recommendation is that you should plan on withdrawing $80,000 a year in retirement. 

Using this figure, you would need to save $2.0 million ($80,000 x 25) for retirement.


Effect of Inflation on Retirement Savings

According to inflationdata.com, average annual inflation since the government began tracking it in 1913 is 3.22 percent. You will need to factor this into your retirement calculation. 

Imagine that:

  • You are 40 years old right now 
  • You plan on retiring at age 65 
  • You expect to spend $80,000 per year in retirement

This means you will need to have a total of $2.0 million saved at age 65. Now you need to adjust that $2.0 million for inflation and see what it will really be worth when you retire in 25 years.

Worth at retirement = $2,000,000 x [1 ÷ (1+3.22%)^25]

Worth at retirement = $904,594

Using the rule of 25 and discounting it by historical inflation figures, this means your initial $80,000 of annual spending will only be able to buy you $36,184 of goods and services (in today's equivalent) when you retire.


Effect of Taxes on Retirement Savings

Depending on whether you invested in a 401(k) or a Roth IRA, you may have to pay taxes on withdrawals from your retirement account.

If you invested in a Roth IRA during your career, then you are clear from taxes on withdrawals. 

If you invested in a 401(k) on the other hand, you will need to pay taxes when you withdraw the money.

This article does a great job of laying out exactly how taxes are calculated on 401(k) withdrawals. Essentially, however much money you take out in a year will be considered your income and you will be taxed in that income bracket.

Continuing the example from above, if you are 40, retiring at 65, and withdraw $80,000 a year from a 401(k), you would be taxed at 22 percent under the new tax plan.

Let's breakdown what this means. That $80,000 withdrawal is now only worth $62,400 after taxes. So, your retirement savings of $2.0 million taxed at 22% is now worth $1.56 million. 

Not bad, right? Wrong. Now we need to adjust it for inflation.

Adjusting it for inflation makes your $2.0 million of retirement savings worth $706,363. 

This means your $80,000 withdrawal during retirement is worth $28,254 in today's dollars.


What Does This Mean?

No one has a crystal ball. No one can sit here and tell you that inflation will be ‘x’ percent for the next 30 years and nobody knows exactly what taxes will look like in the future.

The important thing is to control what you can control. Start investing early, invest as much as you can financially handle right now, and choose quality long-term investments. 

If you do all of this, you will be setting yourself up for a successful and comfortable retirement.

Most Common Types of Retirement Accounts

Whether you choose to invest through a company sponsored retirement account or an individual retirement account (IRA) or both, it is important to be familiar with the similarities and differences of each.

Regardless of which one(s) you choose to use, just remember, the most important thing to do is start early and invest as much as you can early.

401(k)

  • Employer Sponsored: Yes
  • 2020 Maximum Contribution: $19,500
  • Catch-Up Contributions: Can contribute an additional $6,500 if 50 years or older
  • Tax-Deferred: Yes
  • Penalties: If withdraw money before age 59.5 if withdrawals are not exempt
  • Minimum Distributions: Starting at age 70.5

Solo 401(k)

  • Employer Sponsored: For individual business owners with no workers
  • 2020 Maximum Contribution: $57,000
  • Catch-Up Contributions: Can contribute an additional $6,500 if 50 years or older
  • Tax-Deferred: Yes
  • Penalties: If withdraw money before age 59.5 if withdrawals are not exempt
  • Minimum Distributions: Starting at age 70.5

403(b)

  • Employer Sponsored: For non-profit or tax exempt organizations
  • 2020 Maximum Contribution: $19,500
  • Catch-Up Contributions: Can contribute an additional $6,500 if 50 years or older
  • Tax-Deferred: Yes
  • Penalties: If withdraw money before age 59.5 if withdrawals are not exempt
  • Minimum Distributions: Starting at age 70.5

457(b)

  • Employer Sponsored: State and local government employees
  • 2020 Maximum Contribution: $19,500
  • Catch-Up Contributions: Can contribute an additional $6,500 if 50 years or older
  • Tax-Deferred: Yes
  • Penalties: No penalty for withdrawls before age 59.5
  • Minimum Distributions: Starting at age 70.5

Traditional IRA

  • Employer Sponsored: No. Only available to those with earned income.
  • 2020 Maximum Contribution: $6,000
  • Catch-Up Contributions: Can contribute an additional $1,000 if 50 years or older 
  • Tax-Deferred: Yes
  • Penalties: If withdraw money before age 59.5 if withdrawals are not exempt
  • Minimum Distributions: Starting at age 70.5

Roth IRA

  • Employer Sponsored:
  • 2020 Maximum Contribution: $6,000
  • Catch-Up Contributions: Can contribute an additional $1,000 if 50 years or older 
  • Tax-Deferred: No
  • Penalties: If withdraw money before age 59.5 if withdrawals are not exempt
  • Minimum Distributions: No

Self-Directed IRA

  • Employer Sponsored: Same as Traditional IRA but provides a broader range of investments.
  • 2020 Maximum Contribution: $6,000
  • Catch-Up Contributions: Can contribute an additional $1,000 if 50 years or older 
  • Tax-Deferred: Yes
  • Penalties: If withdraw money before age 59.5 if withdrawals are not exempt
  • Minimum Distributions: Starting at age 70.5

Saving for retirement can be an extremely confusing and intimidating topic. Hopefully we were able to provide you with some useful information that you can apply to your retirement planning going forward. Remember, there is no magic solution. Start saving now, invest as much as you can, and ride it out over the long haul.

Time is your friend. Make your money work for you, take advantage of compound interest, and the rest will fall into place.

If you found this helpful, please feel free to share with others!

Retirement Savings By Age

How much should you have in savings at 25?

According to a study by Charles Schwab, Americans currently need $1.7 million to retire comfortably. If you are 25 years old, investing $500 per month at an average annual rate of return of 8.0%, and expect to retire at age 65, you achieve this goal with $0 in your savings today. If your savings are below this amount, you might want to consider investing more each month or finding another source of income to supplement your retirement savings.

How much should you have in savings at 30?

According to a study by Charles Schwab, Americans currently need $1.7 million to retire comfortably. If you are 30 years old, investing $500 per month at an average annual rate of return of 8.0%, and expect to retire at age 65, you should have $33,946 in your savings today. If your savings are below this amount, you might want to consider investing more each month or finding another source of income to supplement your retirement savings.

How much should you have in savings at 35?

According to a study by Charles Schwab, Americans currently need $1.7 million to retire comfortably. If you are 35 years old, investing $500 per month at an average annual rate of return of 8.0%, and expect to retire at age 65, you should have $87,312 in savings today. If your savings are below this amount, you might want to consider investing more each month or finding another source of income to supplement your retirement savings.

How much should you have in savings at 40?

According to a study by Charles Schwab, Americans currently need $1.7 million to retire comfortably. If you are 40 years old, investing $500 per month at an average annual rate of return of 8.0%, and expect to retire at age 65, you should have $166,820 in savings today. If your savings are below this amount, you might want to consider investing more each month or finding another source of income to supplement your retirement savings.

How much should you have in savings at 45?

According to a study by Charles Schwab, Americans currently need $1.7 million to retire comfortably. If you are 45 years old, investing $500 per month at an average annual rate of return of 8.0%, and expect to retire at age 65, you should have $285,274 in savings today. If your savings are below this amount, you might want to consider investing more each month or finding another source of income to supplement your retirement savings.

How much should you have in savings at 50?

According to a study by Charles Schwab, Americans currently need $1.7 million to retire comfortably. If you are 50 years old, investing $500 per month at an average annual rate of return of 8.0%, and expect to retire at age 65, you should have $461,753 in savings today. If your savings are below this amount, you might want to consider investing more each month or finding another source of income to supplement your retirement savings.

How much should you have in savings at 55?

According to a study by Charles Schwab, Americans currently need $1.7 million to retire comfortably. If you are 55 years old, investing $500 per month at an average annual rate of return of 8.0%, and expect to retire at age 65, you should have $724,679 in savings today. If your savings are below this amount, you might want to consider investing more each month or finding another source of income to supplement your retirement savings.

How much should you have in savings at 60?

According to a study by Charles Schwab, Americans currently need $1.7 million to retire comfortably. If you are 60 years old, investing $500 per month at an average annual rate of return of 8.0%, and expect to retire at age 65, you should have $1,116,399 in savings today. If your savings are below this amount, you might want to consider investing more each month or finding another source of income to supplement your retirement savings.

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