Retirement won’t be cheap, here’s what experts recommend to have available by the time you check out from the 9 to 5 grind.

Most people can’t wait to retire, so they can finally have the freedom to do whatever they want, whenever they want. However, determining the best time to do so involves estimating how much money will be required, which calls for serious reflection, educated judgment, and careful consideration.

You may be thinking: “How much do I need to retire?” The answer is subjective and based on factors such as current income, desired retirement lifestyle, and financial stability.

If you want to enjoy a pleasant retirement, you need to consider how you will support yourself financially. Knowing how to save is essential, but it’s only the first step. Tracking your savings with your retirement objectives is important, too. The following are simple formulas you can use to calculate the numbers.

Different Rules of Thumb

In retirement, there’s no universally applicable strategy because people have various requirements, preferences, and objectives. Thankfully, financial experts have developed several guidelines that provide more nuanced advice than “save as much as you can.” You may figure out the necessary amount to fund your retirement.

The 4% Rule

The 4% rule is one of the easiest methods for determining how much you need to save in your upcoming retirement. This calculation involves dividing your anticipated yearly retirement income by 4%.

If your annual income is $96,000, you need a nest egg of around $2.4 million ($96,000 / 0.04) to fund your retirement. After accounting for taxes and inflation, the assumed rate of return on investments is 5%; there will be no other sources of retirement income like social security, and the retiree will maintain their current standard of living.

In general, the 4% rule implies a retirement lifespan of 30 years. Longer-living retirees require longer-lasting portfolios, yet medical bills and other expenses might rise with age.

The Pacing Angle

To determine how much you need to save at various times of your life, it can be helpful to keep a portion of your income.

Some financial experts recommend accumulating the equivalent of your current annual income by age 30. You should have saved three times your present income for retirement by age 40. By the time you reach retirement age, you should have 10 to 12 times your income at that time to be confident that you will have sufficient funds.

Here is a benchmark example:

Remember that your final retirement income multiple should be anywhere between 10 and 12 times your yearly income. For example, if you want to retire at age 65 and your annual income is $145,000, you should set aside between $1.45 million and $1.74 million for retirement. An attractive benchmark is a multiple of your last working year’s salary, and this becomes easier to calculate as retirement approaches and your final yearly remuneration becomes more certain.

An Alternative Formula

One guideline suggests starting in your twenties to save 25% of your annual gross pay. The estimated 25% cost savings may seem high at first. Don’t forget to factor in your other retirement savings in addition to your 401(k) and other matching company payments.

If you follow the steps in this strategy, you should have your annual salary saved by the time you turn 30. If you keep your savings rate at the same, you can expect to get these results:

Save a Million

Being a “millionaire” is still a significant financial achievement, but $1 million today does not go nearly as far as it did in 1980 when $1 million bought the same amount of goods as $3.1 million today.

This rule of thumb tries to maintain a quality of life comparable to one enjoyed before retirement while considering the realities of varying budget levels per line item, such as decreased work-related and housing expenses, possibly offset by increased healthcare expenses.

Note — whether or not you attempt to adhere to the 15% or 25% savings rule, life events will likely impact your real ability to save.

Retirement Savings Factors

Retirement Age

The amount you’ll need to save and the benchmarks you’ll reach along the road can be significantly affected by the age at which you expect to retire. Think about how many years you’ll have after you retire.

As retirement is put off for longer, the savings component might be lowered. Delaying retirement allows your investments more time to grow, shortens your retirement period, and increases your Social Security income.

You may not always be able to decide on a retirement date, as factors such as health and job security may be beyond your control. However, it’s undeniable that working longer will help you save more money.

How You Plan To Live in Post-retirement Age

What do you think your spending habits will be like after you retire? Are you going to reduce it? That’s what we call a below-average way of life. Will you continue to spend as much as you do now? Do you plan on living extravagantly after retirement and spending more than what you’re spending now?

For example, let’s say you’re planning to live frugally in retirement, and you won’t spend much like you used to. It makes sense that your expenses will be lower. Also, some people retire from a primary career but embark on a post-retirement career, earning a supplemental income. This can also be a factor. Your saving factor might be lower than 10x.

If your goal is to maintain your current lifestyle in retirement, then it’s a good idea to have a saving factor of 10x. If you see your retirement to relax or travel extensively, it makes sense that you will save more and plan for higher retirement spending. Your saving factor could be 12x or even more.

Your Health

You also need to consider how your health will change after retirement. It’s a significant consideration, particularly because the costs of medical treatment and care for the elderly are currently on the rise.

The Bottom Line

Clearly, there’s a lot of thought and consideration that needs to go into answering that question.

It’s recommended that people put away 15-25% of their gross income in their 20s and keep doing so throughout their careers. Your retirement savings should come from various sources, such as individual accounts and company contributions. Nevertheless, it ultimately depends on you and your circumstances.

There will be periods when you can save more for retirement and times when you cannot. It’s vital to make steady progress toward your savings goal and to double-check your progress at each milestone.

Never lose sight of your long-term objectives, regardless of your age. If you haven’t yet reached a certain milestone, don’t worry about it too much; there are ways to get there through careful planning and saving. The sooner you act now, the better off you’ll be in your retirement age.

Finny the Finance Bot says…

How much money will I need to retire?

The amount of money you will need to retire depends on several factors, including your current standard of living, your expected standard of living in retirement, how long you expect to live in retirement, and your current debt. Generally, financial experts recommend that you plan to have enough saved to replace 70-90% of your annual pre-retirement income, which would likely give you a comfortable retirement. However, this number can vary greatly depending on your individual circumstances, so it’s best to talk to a financial advisor to determine a more accurate estimate for your retirement savings needs.

The author generated Finny the Finance Bot’s text in part with GPT-3, OpenAI’s large-scale language-generation model. Upon generating draft language, the author reviewed, edited, and revised the language to their own liking and takes ultimate responsibility for the content of this publication.