Guess what? There is no magic ‘one size fits all’ number or thumbrule for everyone to retire. You can find tons of articles (here, here, here, and here) that tell you how much you need to retire. They will say you need a certain multiple of your salary or a magical number like $5 million or you need X% of your ‘pre-retirement’ income. But are any of those really true? If you pay for a finance professional, what do they tell you?
The Big Picture
Looking at the big picture, how much you need for retirement has a whole lot less to do with your income than it does your spending. If you make $100,000 per year after taxes, but spend less than $50,000, why do you need 70-80% or more of your ‘pre-retirement’ income during retirement? If you’re saving half of your income, not only will you be able to retire comfortably, but you’ll also be able to retire much earlier than many, if not most, of your peers. Conversely, if you make $100,000 per year after taxes, but spend $110,000 per year, will you be able to retire? When will you retire? What will retirement look like? It all comes back to on thing I’ve been saying throughout writing the ‘Rat Race Off Ramp’: The key to building wealth is to spend less money than you earn and save the difference.
Think and Plan for Retirement
Maybe you love your job and want to keep working until you’re 70 years old, or maybe you want the freedom that comes with retiring at 50 (or even younger). Either way, you can plan for your retirement, and during that planning, you need to estimate what your costs will be in retirement and how they will be different from now. You’ll need to tackle some big questions during your retirement planning:
When do you want to retire?
Where do you want to retire? Is the cost of living higher or lower than where you live now?
Will you have a mortgage?
How much more will your healthcare costs be?
What will inflation do to all of your costs and expenses between now and retirement and during retirement?
Do you want to travel? If yes, how often and to where?
What big expenses will you have during your retirement? Buying a car? Paying for college or weddings?
Will you expand the hobbies you do or pick up new hobbies in retirement?
These are all questions to think about and plan around when setting your goals and planning for retirement, whether it is in a few years or a few decades. Plan retirement around when you plan to retire and how much you’ll spend. If you want to retire at 50 instead of 70, you will probably need to have more saved to cover 20 years of living expenses. However, if you retire at 50 and live a very simple life in a low cost of living area, you may be able to retire with the same size nest egg as a 70-year-old retiree. We are all individuals, and as such, all of our retirements will look differently.
Below are a few tables that show a starting nest egg at retirement and an estimated withdrawal rate.
If you’re looking to getting moving in the right direction towards retirement, check out the ‘Growing Your Money’ page and the last couple of posts about investing fees and saving for retirement.
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Great post! There are so many things that need to be considered when deciding how much you need to retire. When you are planning for retirement in your 20’s, you also have to think about how much your lifestyle might change as you grow as a person. For example, I always thought that I wanted to retire to a more affordable state in the US because I am from California. Now that I have traveled, I am seriously considering living somewhere abroad during retirement. But I would still want to save enough money to retire in the US if I change my mind or to go back for regular trips.