Discover How to Calculate How Much You Need to Retire—And Why It’s Less (or More) Than You Think
Discover How to Calculate How Much You Need to Retire—And Why It’s Less (or More) Than You Think
Explore the Key Factors That Influence Your Retirement Needs, How to Plan for Financial Freedom, and Why Your Number Might Surprise You
Retirement—just saying the word can evoke all sorts of emotions, from excitement to fear. It’s the ultimate goal for many people, but it’s also the ultimate mystery: How much money do you actually need to retire? The answer isn’t as straightforward as you might think, and depending on your lifestyle, preferences, and goals, the number might surprise you!
The reality is that everyone’s retirement is different. Some people want to spend their golden years traveling the world, while others may be content with a simpler life, focusing on hobbies or spending time with family. Understanding how much you need to retire requires more than just a formula—it’s about considering your personal desires, future goals, and where you want to live.
Let’s Break It Down
Before you can figure out exactly how much you'll need to retire, you need to understand the key factors that go into determining that number:
Where Will You Live? The cost of living will vary significantly depending on where you plan to retire. Are you going to stay where you are or relocate to a more affordable location? The difference between living in a big city like New York or London, and a smaller town or even a different country, can be substantial. Take time to research the cost of living in potential retirement destinations. Websites that track cost of living, like Numbeo, can help you compare various locations.
Plan on Having a Partner? Sharing expenses with a partner often makes retirement more affordable. If you plan on living with someone, consider how their income and retirement savings might contribute. But don't forget, this also means you'll need to discuss financial priorities with your partner and come up with a joint plan.
Your Hobbies and Passions: What Will You Be Doing in Retirement? Retirement isn't just about sitting on the couch all day. What do you want to do with your time? Do you plan on traveling, volunteering, or starting a hobby? These activities come with a cost, whether it's for flights, accommodations, or materials for new hobbies. For example, do you want to kayak or hike every day? Or are you planning on taking art classes or learning a new language? It’s essential to budget for your hobbies when determining how much you need to save for retirement.
Children and Family: Will You Be Supporting Them? Some people want to leave a legacy for their children or grandchildren, whether it's helping pay for their education, a down payment on their first home, or other financial assistance. If you want to help family members in the future, factor this into your retirement planning. While you don't need to set aside an enormous amount for every potential need, it’s worth considering what you'd like to contribute.
What’s Your Health Going to Be Like? Unfortunately, health care costs tend to rise as we get older. If you have any family history of health issues or chronic conditions, you might want to overestimate your health expenses in retirement. Planning for health-related costs is vital to ensure you aren’t caught off guard. Some people make the mistake of underestimating the costs of medical bills in retirement, which can quickly drain retirement savings.
Your Ideal Day in Retirement: Visualize It! Before you can calculate how much you need, it’s important to visualize how you’ll spend your days. What does your ideal day in retirement look like? Do you want to spend your mornings sipping coffee on a balcony overlooking the ocean? Or do you want to be out and about hiking, volunteering, or spending time with family?
Defining your ideal day can help you create financial goals aligned with the life you envision. I highly recommend going through the Ideal Day Visualization Exercise as a key step in setting your retirement goals. Knowing what your ideal retirement looks like will help you identify specific financial goals and allocate resources accordingly. You’ll realize that it’s not just about saving money – it’s about intentionally planning how to spend it in a way that enriches your life. Check out my blog How Defining Your Ideal Day Can Transform Your Finances to learn more about this exercise and how it can help you set clear financial goals
How to Estimate Your Retirement Expenses
Now, let’s get into the nuts and bolts of how to estimate your retirement expenses. This will give you a starting point for determining how much you need to save. Keep in mind, these are just estimates, and your lifestyle may change over time.
Your Monthly Expenses Start by tracking your current monthly expenses. You can use a budgeting tool or app like Mint, YNAB (You Need a Budget), or even an old-school spreadsheet. Consider the following:
Housing: Will your housing costs change in retirement? Perhaps you’ll downsize, or maybe you’ll relocate to an area with a lower cost of living.
Utilities: Don’t forget about heating, electricity, and internet bills.
Food: What are your grocery and dining-out expenses?
Insurance: Health, auto, home, and life insurance costs all need to be factored in.
Debt: Will you still have any debt in retirement? Ideally, your goal should be to retire debt-free, but if you plan on carrying some debt, include these payments in your calculations.
Take your monthly expenses and multiply them by 12 to get your annual expenses. Then, calculate how long you want to be in retirement. A good rule of thumb is planning for a 30-year retirement, but of course, it will depend on your age and personal situation.
Example: Monthly expenses = $3,000 Annual expenses = $3,000 x 12 = $36,000 Retirement savings needed = $36,000 x 25 years = $900,000
Using this formula, you can see how much you’ll need based on your current lifestyle.
The FIRE Formula The FIRE (Financial Independence, Retire Early) community recommends saving 25 times your annual expenses, based on the assumption that you can withdraw 4% of your portfolio each year without depleting it. However, this strategy assumes you will be investing in assets that grow over time and provide returns that outpace inflation.
Add Room for the Unexpected Life is unpredictable, and expenses can vary. You might find that your costs go up because of unforeseen circumstances such as health issues or the need for long-term care. It’s essential to build a cushion into your retirement plan for these unexpected costs. To be safe, aim to save 30-40 times your annual expenses. That way, you’ll have a buffer to handle life’s unexpected curveballs.
Factor in Inflation Don’t forget about inflation. The purchasing power of your money will decrease over time, so you’ll need to factor this into your retirement planning. For example, if you need $3,000 a month now, that number will likely increase in the future. A common rule is to assume an inflation rate of 3% annually.
Want a Quick Estimate? Use This Retirement Calculator
Still want a number? Check out this retirement calculator to get a quick estimate of how much you’ll need to save for retirement based on your expected expenses and savings rate. It’s a great starting point to give you an idea of where you stand.
A Retirement Planning Spreadsheet to Keep You on Track
I’ve also created a retirement planning spreadsheet available on my Etsy shop. This worksheet will allow you to plug in your retirement accounts, your desired retirement number, and your current savings to help you calculate exactly when you can expect to retire. This is a great tool to keep you on track and motivated. Find it here.
Take Control of Your Retirement Plan - Your Future Self Will Thank You!
And don’t forget: start today. Do the work. The sooner you begin planning and saving, the better off you’ll be. Even if you don’t have a perfect plan right now, just taking the first step will set you on the right path. But here’s the catch: Make sure you’re planning for what YOU truly want in retirement, not what you think others expect of you. Too often, people make retirement plans based on societal norms or pressures – like the idea that you should spend your golden years traveling the world or living in a big, luxurious house. But when you dig deep and really think about it, you might find that your ideal retirement looks different. Maybe it's not about jet-setting across continents but rather cultivating a quiet life with hobbies you love or spending more time with family. Embrace what feels right for YOU – the life you envision, not the one others might expect. You might be surprised by what you discover and how your retirement plan aligns with your true desires. Trust yourself to make the right choices that will bring you happiness, security, and peace of mind.
Explore More:
Why Do You Want to Retire? Discover What Drives Your Retirement Goals - Explore the Key Reasons Behind Retirement Planning, How to Set Meaningful Financial Goals, and Build a Future of Freedom and Security
Your Financial Legacy: How to Build Wealth That Lasts for Generations - Discover How to Create a Strong Financial Legacy Through Smart Estate Planning, Wealth Management, and Generational Wealth Strategies
How to Travel in Luxury Without Spending a Fortune - Achieving Affordable Opulence in Your Travels
Living Luxuriously on a Budget: The Art of Affordable Elegance - Elevating Your Lifestyle Without Breaking the Bank
Why It's OK to Have Separate Bank Accounts - Embracing Individuality in Finances
Disclaimer:
This content is for informational purposes only and not legal, financial, or tax advice. Consult a qualified professional for advice specific to your situation. The Financial Confidence Coach is not liable for actions taken based on this information.
