How much money do I really need to retire?


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Retirement should be a wonderful time in your life — but it won’t be if you have financial stress because you don’t have enough money to live off.

Social Security is designed to replace only around 40% of your pre-retirement income, so it’s not going to be enough on its own to sustain you in your golden years. And since most employers don’t provide guaranteed pension benefits anymore, you’re going to need to produce some of this income from retirement savings.

To make sure you’re able to support yourself, you need to think about how much money you’re going to spend in retirement and make sure you can generate an appropriate amount of income from your investments.

You also need to think about healthcare costs and tax rates as you age, since these can reduce the amount of money you have available.

This guide will help you understand how much money you need to retire so you’re prepared when the time finally comes.

Determining How Much Money You’ll Need to Live On During Retirement

There are a few different ways you can try to determine the amount of money you’ll need in retirement.

What the Experts Say

Some financial experts suggest making sure you have enough savings to replace 80% of your pre-retirement income. Other studies suggest you’ll actually need closer to 90% or even 100%.

Think about the lifestyle you want — if you plan to travel and don’t plan to downsize your house, you’ll probably need closer to 100%.

Example Retirement Calculation

Estimating how much you’ll need to live on can give you an idea of the total nest egg you need to accumulate. That’s because financial experts also suggest withdrawing 4% from your retirement accounts in your first year after leaving work, then increasing this amount only by inflation each year.

So, if you need your retirement investments to produce $40,000 in annual income, you’d multiply $40,000 by 25 years (or however long you plan to live in retirement). In this example, you’d need to have saved $1 million.

Another Strategy

If all of these calculations seem complicated, another common rule is to have 10 times your final salary saved. If you’re making $70,000 when you leave the workforce, you would need $700,000 in retirement savings to be ready to retire if you take this approach.

All of these formulas provide general estimates and may not work for everyone. But they can provide a good jumping-off point to give you an idea of how much money you’ll need to support yourself based on your life expectancy. You can also try various retirement calculators online if you need assistance.

Create a Sample Budget

If you want to be more accurate in estimating your retirement income needs, you can also opt to create a sample budget instead. Your budget should take into account all of the costs you’ll likely incur as a senior, including:

  • Housing
  • Healthcare (including insurance)
  • Food
  • Clothing
  • Transportation
  • Taxes
  • Providing continued support to your family (if applicable)
  • Travel
  • Entertainment

Some of your expenses will probably fall as a retiree. For example, you may have your mortgage paid off so your housing costs will only include property taxes, insurance, and home maintenance. Or, you may downsize and rent a smaller place. On the other hand, your travel budget and entertainment budgets may rise.

Think about your current lifestyle and how you plan to live as a retiree and adjust your sample budget and savings goals accordingly.

Effects of Taxes

Of course, you can’t forget to factor taxes into your calculations, since you’re still responsible for paying them in retirement.

As a senior, you’ll continue to owe state and federal taxes, although the rules differ from state to state. The federal government taxes withdrawals from 401(k)s and other types of investment accounts as ordinary income, as do most states.

When it comes to Roth 401(k)s and Roth IRAs, you won’t be taxed on those withdrawals because your contributions were made post-tax.

The federal government also taxes most pension income, but many states don’t. If you live in Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, or Wyoming, there’s no tax on pensions.

Meanwhile, Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, South Carolina, Utah, Virginia, and Wisconsin exempt at least some pension income from taxation.

Most states don’t tax Social Security income. In fact, only 13 states do:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

The federal government does tax Social Security benefits depending on the tax bracket in which you fall. If you’re a single filer, you’ll be taxed on up to 50% of benefits when your income is between $25,000 and $34,000, or up to 85% if you make more than $34,000.

If you’re married and file jointly and your combined income is between $32,000 and $44,000, you could be taxed on up to 50% of your benefits; the percentage rises to up to 85% if you make more than $44,000 in combined income on a joint return.

When calculating your “income” to determine if you’ll pay taxes on Social Security, only certain income counts. You figure out your income by adding up all taxable income (such as pension benefits), some non-taxable income (such as income from Muni bonds), and half of your Social Security benefits.


You’ll also have to consider healthcare expenses as a retired senior. Healthcare can be extremely expensive for older people, even with Medicare, because there are many things that aren’t fully covered — or even covered at all.

In fact, the Employee Benefit Research Institute estimated in 2018 that a senior couple whose prescription drug needs were in the 90th percentile would need to have an estimated $400,000 saved in order to have a 90% chance of being able to cover all their healthcare costs in retirement.

Healthcare grows more expensive each year, and as of Q2 2019, the year-over-year growth in healthcare spending was at 5.0%. You’ll need a plan to pay not just for Medicare premiums but also for supplemental insurance as well as out-of-pocket expenses that rise each year. A health savings account can help you save for these anticipated costs.

What Will Your Sources of Income Be During Retirement?

When planning for the amount of income you’ll need for retirement, it’s important to think about all of the potential sources of income you’ll have.

For most seniors, these income sources include Social Security and retirement accounts. For some people, employer-provided pensions also provide some income — but pensions are more common for government workers than for people who worked in the private sector.

Social Security Benefits

Social Security benefits are designed to replace around 40% of your retirement income. Your benefits are calculated based on your highest 35 years of wages, adjusted for inflation. This calculation gives you your Averaged Monthly Indexed Earnings (AIME), which helps determine your Primary Insurance Amount (PIA) using a specific formula designed by the Social Security Administration (SSA).

Your PIA is the amount you’d receive if you retired at full retirement age (FRA). FRA is determined based on your birth year. If you were born after 1960, your FRA is 67. Retiring early results in a reduction of benefits equal to 5/9 of 1% for each month prior to FRA, and an additional reduction of 5/12 of 1% for each month when you retire more than 36 months early.

If you retire after FRA, you can earn delayed retirement credits until age 70, which can further boost your benefits.

Once you claim Social Security, you’ll begin receiving benefits in the form of monthly deposits. You can claim as early as age 62, but your benefits will be much lower than if you wait until FRA or even later. You’ll also receive periodic cost of living adjustments (COLA), which aim to help ensure your benefits keep pace with inflation.

Investment Accounts

Investment accounts should also produce a large percentage of your retirement income.

Ideally, throughout your career, you’ll have invested your money into accounts that provide tax breaks for retirement savings. These can include 401(k)s and 403(b)s, which are typically offered through employers, as well as IRAs.

You’ll want to make sure your contributions are invested in an appropriate mix of assets to produce a reasonable rate of return while also taking into account your risk comfort level.

As a senior, you usually can’t afford to have all of your money invested in stocks — even though stocks provide better returns than bonds — because you can’t wait out market downturns. Most experts recommend you subtract your age from 100 to figure out the percentage of your portfolio you should invest in stocks.

The less of your portfolio invested in stocks and the more you put into safer investments such as bonds, the lower your overall portfolio returns will be. You’ll also have a greater risk of running out of money. Your investment returns should ideally help keep your principal balance from declining, even as you withdraw money each year.

As previously mentioned, the 4% rule is designed to ensure your savings last throughout retirement. If you start by withdrawing 4% in your first year and increase withdrawals by inflation annually thereafter, you should be pretty safe as long as you’ve invested responsibly.


Defined benefit pensions are an ideal source of retirement income but aren’t available to many employees. If your employer provides a pension, you’ll receive a set amount of money each month to live on once you enter retirement. This usually lasts until you die.

Your pension is based on your overall earnings along with the number of years you worked for that employer. If you’re eligible for a workplace pension, ideally you should work long enough to ensure you receive a generous amount of income.

If your pension and Social Security benefits combined can provide you with enough to live on, you’ll have ample financial security in retirement because you won’t have to worry about your investment dollars running out before you die.

Bottom Line: Figuring Out How Much You Need to Retire is Possible

It’s up to you to make sure you have enough retirement income. Make sure you understand how to maximize your Social Security benefits by working for at least 35 years and not claiming benefits until at least full retirement age, if possible.

Also, consider how much money you’ll need to supplement Social Security and try to put enough into retirement accounts to ensure your investments will produce the desired income.

By sticking to a diligent savings plan during your working years and being responsible with how much you spend as a senior, you can hopefully ensure your investment benefits don’t run out too early and that you have plenty of money to live on as a retiree.

This article originally appeared on and was syndicated by

Image Credit: ijeab / iStock.


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