How Much Money Do I Need to Retire?

6 min read

Posted on Feb 16, 2021

Planning retirement

One of the most common questions from people approaching their retirement age is, “Did I save enough?” Although it would be great if there was a quick answer to this question, in reality there are so many factors that go into the retirement planning process. Relying on social security alone is no longer enough for most people who retire. Here are the major factors to consider when figuring out your retirement savings goal.

Who You Are Affects Your Retirement Fund

Your retirement nest egg will depend on the type of life you want to live as a retiree. Your living expenses, life expectancy and lifestyle choices all play a role in the amount you should save for retirement.

Calculate Living Expenses

How much are your living expenses? Do you envision living modestly or do you look forward to spending more time traveling and spoiling your grandchildren? Knowing what it costs to pay for your current, and future lifestyle, is a great place to start! Financial planners suggest that you first look at what it costs to cover your lifestyle today. To do this, they recommend that you look at the last 12 months of expenses. This will give you a better perspective on what you might need in retirement. You can then determine your retirement budget by taking away expenses that will stop, and adding those new expenses to pay for your dream retirement.

Estimate Life Expectancy

Next, you’ll want to estimate how long you will likely live. Based on your current health and advancements in medicine, you may be lucky enough to live well into your 90s. The Social Security Administration found that on average, men reaching the age of 65 today can expect to live until they are 84.3. And, the average life expectancy for women aged 65 today is 86.7. They also found that 25% of adults aged 65 today will live past 90, and 10% will make it to age 95. Use their Life Expectancy Calculator to estimate your life expectancy. Once you have a baseline for your estimated life expectancy, multiply the annual amount needed by the number of years you don’t plan to be working to get a high-level estimate of how much you should save for retirement. Do you believe your current retirement savings will last you that long? If your family history indicates that you are more likely to make it to 95 rather than 75, it’s very wise to consider saving more than the average person should.

Lifestyle Choices in Retirement

When developing a retirement savings strategy, budget for items outside normal living expenses that will stay with you during retirement. For example, perhaps you will no longer pay for your child’s private school tuition as a retiree, but you will continue your membership at your local country club. You should also consider those “surprise” expenses such as home maintenance and car repair.

To see a typical retirement budget and information on how much you should plan to retire Hawaii, read our article, Planning a Retirement Budget.

Rules of Thumb for Retirement Savings

Now that you have an idea of how much you need each year to pay for your retirement expenses, you can estimate how much you need to invest in order to reach your goal.

An easy tool to use is First Hawaiian Bank’s retirement calculator. This calculator will consider factors including age, current income, inflation and social security. Another option is to consider a rule of thumb. The 4% rule estimates how much money you can safely withdraw from your nest egg per year, once you reach your retirement age. Let’s say you saved $1.25 million for retirement. You should be safe to withdraw 4% of that amount, or $50,000 annually. ($1,250,000 X .04 = $50,000). By following this formula, you should have a very high probability of not outliving your money during a 30-year retirement.

Create a Solid Retirement Plan

Rules of thumb are not a replacement for sound financial advice. These are general guidelines to give you a high-level estimate and don't account for all of the nuances of life like taxes and spending for other life goals. A Wealth Advisor can help to create a customized financial plan that considers your specific needs. If you’d like to speak with a wealth advisor, please contact us to set up an appointment.

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