It doesn’t matter how old you are; you need to know how much you need to retire. The sooner you understand this, the better equipped you’ll be to plan your financial roadmap. If you plan to retire at age 35, you’d need a hyper-aggressive investment plan. If you plan to retire at 70 and are already 65, you may need to start considering a conservative investment portfolio. Regardless, you need to learn to calculate your retirement number so you can start working towards that goal. Surprisingly, you can calculate this in just a few simple steps. Read on to learn how!

1. Estimate your expenses in retirement

Retirement expenses that will decrease

The first thing to do is figure out how much you spend every year on average. From there, consider expenses that will likely decrease. For example, you won’t need to factor in transportation to and from work. You also won’t have to refresh your work attire regularly. And as we age, our food consumption will also drop. You may pay off your home in retirement, eliminating your monthly mortgage. However, while many expenses will decrease, there will be new expenses that will arise.

New expenses in retirement

One of the most common mistakes people make when planning for retirement is assuming their expenses will remain the same. But that is far from reality. For example, most people will lose most, if not all, of their health insurance once they retire and will need to start paying for private health insurance. Depending on the plan, a typical monthly cost is around $500 per person. So, for 2 people, that becomes a new $12,000 annual expense!

Aside from higher medical expenses, paying for additional help is another common expense. Most of us muggles don’t usually pay for extra help around the house when we’re young. But in retirement, things change. According to Genworth’s Cost of Care Survey, the average monthly in-home care (excludes medical services) cost is upwards of $5,000 per month. With medical services, that cost only increases.

2. Determine how long your retirement will be

Now that you’ve estimated your retirement expenses, you need to estimate how long you plan to be in retirement. The earlier you retire, the more you’ll need. Obviously, you can’t predict your exact lifespan, so assume you’ll live a long, healthy life. It is better to have too much money in retirement than not enough. That’s the last thing you’ll want to worry about.

3. Calculate how much you need to retire

How does the 4% Rule work?

The short and easy way to approximate how much you need is by using the 4% Rule. This back-of-the-napkin estimation says you can withdraw 4% of your overall retirement savings and investments every year for 30 years. Said another way, you can withdraw 1/25th of your retirement every year. Let’s look at a brief example:

Retirement savings: $1 million
Annual withdrawal (4%): $40,000

In this example, withdrawing $40k annually will deplete $1 million in 25 years":

$1 million / $40,000 per year = 25 years

So what happened to the 4% Rule lasting 30 years? Well, this rule assumes your retirement savings remain invested in a balanced portfolio of stocks and bonds and not just sitting in a bank account idly.

How to calculate your retirement number (in detail)

The more detailed answer uses your numbers from steps 1 and 2 above and uses the following formula:

Retirement number = Expenses in retirement x number of years in retirement

Here’s an example:

Expenses in retirement: $100,000
# of years in retirement: 30

Your retirement number = $3,000,000

This would be a very safe, conservative estimate. For example, someone who retires today could throw all $3,000,000 into current 30-year Treasury Bonds that will earn 4.3% annually. Granted, they will only receive payments twice a year from their bond investment, but that interest alone would yield $129,000 every year, easily covering their $100,000 expenses. Not only would it cover their expenses, their nest egg could continue growing.

Additionally, Social Security will kick in between the ages of 62 and 67, depending on your birth year and when you decide to start collecting. That will be another source of income that will supplement your retirement. Lastly, some individuals may have pensions to rely on, though most plans will not cover 100% of their pre-retirement salaries nowadays.

Conclusion

Admittedly, the retirement number calculated in step 3 above is very conservative. So do you really need to save that much to retire? Mathematically, no. But I prefer to err on the side of caution, as there are so many unknowns that may come up:

Unexpected health issues
In-home care costs
Macroeconomic problems like war and global warming
Business owner-retirees may see their businesses lose money or go bankrupt
High inflation, as experienced in 2021 and 2022
Financial support for the previous generation, children, and/or grandchildren
Large losses in retirement investments
Unplanned damage or rehab costs for your residence

I’m sure there are many more variables I haven’t thought of yet, but only you can decide what you would be comfortable retiring with. Please comment below on your retirement age & numbers and how you calculated them!

How to Calculate How Much You Need to Retire