By Sam Swenson • Updated on April 3, 2023
The question “How much money do I need to retire?” is a reasonable one: people want to know that they’re “on track” and that they’re doing everything they can to eventually retire.
The answer isn’t so simple. Everyone’s retirement number is unique to their personal circumstances, lifestyle, goals, and a host of other factors.
But a good place to start is to examine your spending habits. Ask yourself a few questions:
In this article, we’ll review some basic advice on retirement saving and help you think about “your number” to retire. We’ll also look at some of the more popular retirement accounts and how they work.
This number is different for everyone, but a good place to start is to look at your annual spending. Note that this isn’t your income (how much you bring in) but your spending (how much goes out). We need to think about how much money you’d need to accumulate to cover annual spending for at least three decades, the length of a typical extended retirement.
A famed study from over twenty years ago – the Trinity Study – sought to answer this question. It found that by starting with an asset base of 25 times your current spending, you’d be able to withdraw 4% every year with a minimal probability of running out of money within a 30-year timeframe.
Let’s walk through an example to demonstrate what this means. Using real numbers, assuming your annual spending is $50,000, you would need 25 times that — or $1.25 million — to retire comfortably. This idea forms the very basis of the “4% rule.” In this example, with $1.25 million, you’d be able to withdraw 4% annually (and adjusted for inflation) to cover your living expenses for 30 years.
These conclusions rest on a few assumptions:
Again, this is useful guideline, but not a hard and fast rule. Your retirement may look different than this: for example, you might work part time to add to your yearly income, or want to retire for more than 30 years. Most importantly, past market returns do not guarantee future results.
Even though this won’t give you an exact number, the principles still apply – you want to make sure you save enough to support your spending needs – modest or expensive – throughout the entirety of your retirement, whether that’s 30 years or longer.
The answer to this question is to save as much as possible, or as much as you comfortably can while still making ends meet today.
A great place to start is by saving 10% of your pre-tax income, and if you’re employed, this might be through contributions to your employer-sponsored plan, like a 401(k) or 403(b). Many employers offer matching contributions up to a specified percentage of income, so be sure to take advantage of that if it’s available to you.
Say you earn $100,000 per year and follow the general advice to contribute 10% of your income to your company’s 401(k) plan. Also imagine that the underlying investments in your 401(k) generate 8% a year in returns.
Now, think about what would happen if you increase your contribution percentage by only 1%:
|Starting Balance||Contribution Percentage (%)||Annual Contribution ($)||Time to Retirement||Yearly returns||Ending Balance|
You can see that with each 1% increase in contribution, your ending balance increases by over six figures. Further, this assumes that you never get a raise and that you’ll retire after 30 years of work.
Regardless of how much you earn, a good place to start is to contribute as much as you comfortably can while still meeting your current and short-term spending needs.
One of the best places to save for retirement is your employer’s 401(k) or 403(b) plan. These accounts allow you to deposit money on a pre-tax basis – from there, it will grow tax-deferred until withdrawals occur in retirement. Many employers also offer an “employer match” through which your contributions will be matched dollar-for-dollar up to a specified percentage of compensation.
Independent from your employer, you have the option to open pre- and post-tax retirement accounts in the form of traditional and Roth IRAs, respectively. The Roth IRA, in particular, is advantageous because once you contribute money, you won’t pay tax again when you withdraw.
If you’re self-employed, you may also enter the world of solo 401(k)s, SEP-IRAs, and SIMPLE 401(k)s, and if you’re a government employee, the 457(b) will be relevant to you. Regardless of the vehicle, the general guidance is the same: contribute to your retirement plan early and often.
Depending on your age, you may be eligible for “catch-up” contributions in your 401(k) or IRA. For those over 50, you can contribute an additional $6,500 to your 401(k) in 2021, for a total of $26,000. You can also contribute an additional $1,000 to an IRA in 2021, for a total of $7,000.
There are also a few levers to pull if you feel that you’re falling behind. Among them:
If you have one or more 401(k)s) left over from previous jobs, you can roll those accounts to an IRA at a new provider. This can be a great way to get more control over your retirement savings.
Some of the benefits of rollovers include:
When it comes to saving for retirement, simple, incremental actions can make a huge difference when applied consistently over time. Even a 1% increase in your contribution to your employer plan can add hundreds of thousands of dollars to your retirement over time. Make sure to evaluate your entire personal financial situation before planning retirement and don’t be afraid to consult with an independent advisor should you feel you need the help.