How much money do you need to retire? This is a question many people ask. Luckily, our guide here explains the amount you should save.

How Much Money Do You Need to Retire?

Three things are certain in life: taxes, death, and if you’re a worker, retirement.

Sure, there are those people who work until they drop dead or are forced out because of ill health. There are those who will pass away before they hit the retirement age. But if you’re anything like most people in the U.S., you’ll hang up your spurs at around the age of 65.

Are you making financial preparations for your retirement? This brings us to another pertinent question, just how much money do you need to retire?

In this article, we’re taking a deep dive into retirement mathematics. Read on to learn more!

How Much Money Do You Need to Retire?

The truth is there isn’t a fixed amount of money you need to retire comfortably. This is because we lead different lives. We’re in different states of health. There are various factors that will determine the amount of money you’ll need for your retirement – more on this shortly.

However, many experts have conducted research and arrived at an average amount. In 2019, for instance, a Charles Schwab survey established that people need $1.7 million for a comfortable retirement! Another study says you need $1.2 million.

Other experts have a more standard formula for calculating retirement amounts. They say you need 10 to 12 times your annual income for proper retirement.

This is to say, if you were earning $100,000 annually, you should have anywhere from $1 million to $1.2 million by the time you’re ready to retire.

Of course, there are bound to be disparities from study to study, but you can see a trend. Generally, you need something in the ballpark of million dollars to retire! How high it goes above this threshold will largely depend on the quality of life you want to sustain during your retirement.

So, now that you have a clearer picture of the average amount of money needed for retirement, let’s focus on the various factors that will determine how much you will need.

Your Cost of Living

In retirement, the general expectation is that you’ll continue to maintain the quality of life you had when you were working — if not better. In fact, a good number of people want to have a better life in retirement. This is why you hear of people wanting to retire to a beach house or a luxury home in the mountains.

As such, your current cost of living is a big factor in determining the amount of money you need to retire.

If you’re living in a place like New York where the cost of living is super high, you’re going to need a lot more money to retire in the same area, compared to someone living in an area like Alabama where the cost of living is substantially lower.

And, if your dream is to have an even greater quality of life in retirement, the amount you need to tire is only going to increase. Keep this in mind as you plan your finances for retirement.

Economic Conditions

Even if you’re not an economist, you’ve probably heard of the word “inflation.”

Inflation occurs when there’s a change in the cost of goods and services compared to the purchasing power of a certain currency. When inflation rises, the purchasing power of the dollar reduces. This means each unit of currency buys fewer goods and services.

With this information, it’s easy to understand how inflation influences retirement plans. In other words, having $1.7 million today might be adequate for your retirement, but if you’ll actually be retiring in the next 30 years, this amount of money won’t hold the same value. If the cost of goods and services will have grown (increasing inflation) and it’s likely to rise considering inflation trends, you’re going to need a lot more money to retire.

This is why you might come across an article stating that people needed, say, $100,000 to retire in the 70s. But you’ll also find another figure (much greater) that has been adjusted for inflation.

As you do your retirement calculations, consider the effect of inflation, especially if you’re a young adult with a couple of decades ahead of you before retirement.

If you’re currently looking to start planning or you’re not sure whether it’s the right time to get started, you can always learn more about retirement planning for deeper insight.

Your Health

According to Fidelity Investments, the average 65-year-old couple will spend about $295,000 (2020 dollars) in medical expenses during retirement. This includes short-term and long-term care.

Of course, it’s a well-established fact that healthcare is expensive in the United States. When you’re doing retirement planning, you have to consider the cost of healthcare.

Although this may not be a big concern for people who’re in good health, it helps to keep in mind that as we grow older, we become more vulnerable to ill health. In 2018, 22 percent of noninstitutionalized people over 66 were in fair or poor health.

Purchasing adequate health insurance is an ideal way to caution yourself from financial liability when you’re retired, but insurance isn’t limitless. If you’re suffering from a chronic condition that needs long-term care, insurance isn’t going to take care of all your medical expenses.

There are other non-medical expenses that could crop up. For example, if you have to use a wheelchair, you may need to make some structural changes to your home so that it’s friendly to your disability. This can be a big expense that you never planned for.

Adequate Planning for Retirement Is Crucial

For most people, the expectation is they’ll call it a day and retire from active work life. Because you won’t be working in retirement, it’s important to ensure you’ve enough money saved up. But how much money do you need to retire?

With this guide, you now have an idea of how much money you’ll need in retirement. The exact figure is going to be different for everyone, so you need to know the factors that will influence how much you’ll need.

Explore our blog for more tips on how to retire.

Leave a Reply