I Am a Retirement Planner, & Here’s How Much You Really Need to Retire

Written by Brandon Renfro

Financial Expert

Edited by Kristin Marino

Managing Editor

A recent study from Northwestern Mutual found that the average American believes they’ll need $1.46 million to retire comfortably.

That number is interesting, and I’m sure it accurately reflects the average. However, I sometimes cringe when I see these stats because I know some people will read them and get the wrong idea, concluding they need to save $1.46 million before they retire.

The problem is that number has nothing to do with you.

Let’s use an analogy to illustrate. What if I told you that the average American’s pant size is “x”… I have no idea what it is, but fill in the size of your choice.

Does that have any relevance to you when you set out to buy yourself a pair of pants? Of course not! All that matters is the size that you wear. Average height has nothing to do with whether you can reach something on a shelf, and average eyesight doesn’t affect whether or not you need glasses.

Retirement works the same way. What matters is the amount you need to have saved to support yourself the way you want to comfortably. How do you figure out what that amount is? Here’s a basic format you can follow.

Determine Your Spending Needs

The whole point of retirement savings is to turn it into spending later, making that the real target. So, let’s start there. Your lifestyle choices in retirement, activities, and needs all come into play.

The younger you are, the more you’ll need to estimate. As you get closer to retirement, refine that estimate as things become more evident.

When you are close to retirement, you should have a pretty good idea of what you want to spend each month or year because you’ll have a better idea of what your lifestyle will be.

Simply adjust your current budget for the things that will change when you retire. For example, you may spend less on business travel or more on traveling for vacations. Again, these adjustments are personal and specific to you.

If you’re young enough that retirement seems distant, or you have a hard time even imagining what your life will be like when you get to that age, you should start with some basic rules of thumb.

For simplicity, you could skip the retirement spending estimation and jump right to a retirement savings goal, such as 15% of your income.

This is enough to put most people on a good path toward retirement readiness as long as they start early. The Northwestern Mutual study showed that Americans are starting to save earlier on average, which is a good sign.

Pros & Cons of Determining How Much You Need to Retire

While there is no downside to retirement planning, it’s essential to recognize that the process can present some challenges.

The pros of retirement planning are clear: it provides a personalized roadmap to financial security and peace of mind.

However, there are also some hurdles you may need to clear along the way.

The cons outlined below aren’t reasons to avoid retirement planning but rather things to watch out for as you navigate this crucial financial journey.

By being aware of these potential challenges, you can better prepare yourself and ensure your retirement plan is as solid and stress-free as possible.

Subtract Other Retirement Income Sources

Once you determine how much you’ll want to spend in retirement, it’s a matter of figuring out where that will come from. Your savings is probably not the only source of income you’ll have.

Start with these if you have a pension or annuity or will collect Social Security. Because these types of income are guaranteed, they can provide a stable floor of income you won’t need to cover with your savings.

For a simple example, assume you estimate you’ll need $6,000 monthly in retirement. If you expect to collect $2,000 monthly in Social Security payments, you’ll need to get the other $4,000 from savings.

How to Get a Social Security Benefits Estimate

You can get an estimate of your Social Security benefits from the Social Security Administration’s website.

If you have a pension

If you have a pension, your benefit will be based on a formula. Each pension does it differently, but generally, it’s a function of your income and years of service.

It may also factor in the age at which you retire. Your employer can give you documentation explaining how it works if you don’t already know.

If you have an annuity

Annuities also provide guaranteed income in retirement. The way your payment is determined depends on the type of annuity you have. You’ll need to check your contract, but an annuity calculator can also help.

Choose a Withdrawal Strategy You’re Comfortable With

Withdrawing from your savings is a balancing act.

On one hand, you want to withdraw enough each year to get the most satisfaction and enjoyment from your savings you can.

On the other hand, you want to play it safe enough not to risk running out of money too soon.

Since we can’t predict the future, we can’t know how the variables that affect that balance will play out, such as how our investments will perform or how long we will live. Again, this requires us to estimate.

Fortunately, there are some guidelines to help us.

The 4% Rule for Retirement Withdrawal

Starting with the 4% rule is helpful if you are new to withdrawal strategies. It’s not a hard and fast “rule” that you necessarily should follow. Instead, it’s a framework for helping you understand how to approach your withdrawal plan. Modify it to fit you.

In short, the study that established the 4% rule found that if someone retired and withdrew 4% of their savings balance in the first year of retirement (and adjusted their withdrawal each year for inflation), they could have historically gone at least 30 years without running out of money, regardless of when they retired.

I encourage you to read the original article if this is the kind of thing you intend to do on your own, but some key assumptions and takeaways include:

• This worked for portfolios that contained between 50-75% stocks. If that allocation is too aggressive for you, you would need to reduce your withdrawal rate.

• 30 years may not accurately reflect your own retirement period. If you’re older or have a shorter life expectancy due to health or family history, you may not need your savings to last that long. This indicates you could withdraw more.

• 4% worked in the worst historical case. A higher withdrawal rate would have lasted 30 years in all the others. A downside to this is that withdrawing only 4% meant the retiree could have safely withdrawn more – with the benefit of hindsight.

• Just because it worked in the past doesn’t mean it will work in the future.

Your planned retirement age also impacts how long your savings will need to last.

The Northwestern Mutual study suggests that the expected retirement age is decreasing, indicating that savings must last longer.

There are many approaches to withdrawing money from your retirement savings. Each has its benefits and drawbacks.

Some extend or modify the framework in the 4% rule, while others take entirely different approaches.

The point here is that you’ll want to find an approach that you can realistically expect to work for you and that you are comfortable with.

Don’t Neglect to Plan for Taxes

I implicitly assumed that you considered taxes in your spending needs above, and the income numbers were all gross figures before taxes were taken out.

In other words, that $6,000 per month includes the amount you’ll owe in taxes and part of that savings withdrawal and Social Security payment would go towards covering it.

Another approach would be to consider your net spending needs but reduce your income figures to account for the taxes you’ll owe.

So, maybe you only consider $5,000 per month as your spending need, but then you would only consider the net, after-tax value of your withdrawal or Social Security payments in the income figure.

Either way is acceptable as long as you do account for taxes. You must pay attention to the effects of taxation to ensure you’ll be adequately prepared.

Plan for Your Retirement, Not Someone Else’s

There’s nothing inherently wrong with average retirement savings numbers.

It’s just that they are not specific, so if you use them as a planning target, then the resulting plan won’t reflect what you need, and you may find that you are considerably off the mark.

Instead, estimate your needs and develop a plan that is better suited to helping you achieve your retirement goals.