Determining your retirement number—the total savings needed to maintain your desired lifestyle—is one of the most important steps in financial planning.
While the question “How much money do you need to retire?” might seem simple, it’s far from straightforward. Retirement planning involves a variety of variables, including your expected expenses, income sources, inflation, and longevity.
According to a Synchrony, fewer than 44% of Americans had carefully considered how much they would need to budget for retirement, even though the top financial concerns among retirees are clear: healthcare costs (71%), inflation (67%), and market downturns (66%). Understanding your retirement number can help you avoid underfunding your golden years and build confidence that your savings will last.
The 25x Rule: A Baseline for Retirement Savings
One common method financial experts use to estimate a retirement number is the 25x rule. This approach recommends saving 25 times the amount you expect to spend annually in retirement.
To calculate your retirement target, start by assessing your current monthly expenses. Multiply that figure by 12 to estimate your yearly budget, then multiply by 25. For example, if your monthly expenses are $4,000, your annual expenses are $48,000. Multiplying by 25 gives a target retirement savings of $1.2 million.
This baseline assumes your investment portfolio grows at approximately 6% per year, a historical average for the S&P 500. Keep in mind that factors such as Social Security benefits, pensions, part-time income, and rental property can reduce the amount you need to save, whereas healthcare costs and lifestyle ambitions can increase it according to Investopedia.
Determining Your Retirement Age
Knowing how much you need is only half the equation—you also need to estimate when you can retire. Start by comparing your 25x number to your current savings. Estimate how much your existing investments will grow by your target retirement age, factoring in a 6% annual growth rate. Then, divide the remaining amount by your projected yearly savings to determine how many years it will take to reach your target.
For instance, if your retirement target is $900,000, and you have already saved $75,000, that initial balance could grow to $431,000 by age 65. The remaining $394,000 would need to come from your annual contributions. Saving $12,000 per year would allow you to reach your target in about 33 years, meaning a 35-year-old could retire around age 68. This is a simplified model, but it highlights the importance of early, consistent saving.
Projecting Your Retirement Savings
To anticipate your future savings, consider both your current investments and ongoing contributions. If you’re 30 years old with $50,000 in savings and plan to retire at 65, that initial amount could grow to approximately $384,000 over 35 years at a 6% annual return. Adding $500 per month ($6,000 per year) in contributions could accumulate to an additional $669,000, bringing total retirement savings to $1,053,000. Investing wisely, rather than letting money sit idle, significantly increases the likelihood of meeting your retirement goals.
Factoring in Inflation
Inflation can erode purchasing power, making it critical to factor into retirement planning. Historically, inflation averages around 3% annually, but extraordinary events can temporarily push it higher, such as the 7% inflation spike seen in 2021. Healthcare costs for retirees often rise faster than general inflation; out-of-pocket healthcare spending increased by 4.6% in 2020. Considering inflation ensures your retirement savings retain their intended value over time.
Safe Withdrawal Strategies: The 4% Rule
Once retired, maintaining a sustainable withdrawal rate is key. Financial planners often recommend the 4% rule: withdraw 4% of your retirement portfolio in the first year and adjust annually for inflation. For example, an $800,000 portfolio would allow for $32,000 in the first year. If inflation is 3%, the next year’s withdrawal would increase to $32,960. Using this approach helps ensure your savings last through retirement, even with market fluctuations.
Planning for the future: mapping out retirement goals and strategies on paper.
Planning Your Retirement Budget
Retirement expenses evolve over time. In the first decade, retirees often maintain an active lifestyle, adjusting spending as they settle into retirement. In the second decade, expenses generally decline as housing and day-to-day costs drop, but healthcare and long-term care may rise. In the final decade, retirees may face assisted living or specialized care costs, requiring careful planning to ensure sufficient income for medical needs and emergencies.
Social Security and Income Sources
Social Security provides a critical boost to retirement income. Your benefits depend on your lifetime earnings, the age at which you begin receiving payments, and your birth year. For example, retirees can begin claiming benefits at age 62 but will receive only about 75% of the full benefit. Waiting until age 70 increases payments to 132% of the full retirement age benefit. Deciding when to claim Social Security involves balancing immediate income needs against maximizing long-term benefits.
Required Minimum Distributions and Tax Planning
Tax-advantaged accounts like 401(k)s and traditional IRAs grow tax-deferred, but withdrawals are taxed as ordinary income. At age 72, the IRS requires minimum distributions (RMDs), calculated using your account balance and life expectancy factor. Failing to withdraw the required amount incurs a 50% penalty (IRS, 2025). Planning around RMDs and strategically using Roth IRAs or charitable donations can reduce your tax burden in retirement.
People Also Ask
How do I calculate my retirement number?
Your retirement number is calculated by estimating your future annual expenses and multiplying that figure by 25, known as the 25x rule. This baseline assumes your investments will grow at an average of 6% annually. Adjustments should be made for Social Security, pensions, healthcare costs, and inflation to create a realistic savings goal.
What is a safe withdrawal rate in retirement?
A commonly recommended safe withdrawal rate is 4% annually. This means you withdraw 4% of your portfolio in the first year of retirement and then adjust for inflation each subsequent year. This approach helps ensure your savings last for a typical 30-year retirement.
How does inflation affect retirement savings?
Inflation erodes the purchasing power of your money over time. While the historical average is around 3% per year, healthcare and living costs for retirees can rise faster. Accounting for inflation in your retirement planning is essential to maintain your desired lifestyle.
At what age can I retire comfortably?
The age you can retire comfortably depends on your current savings, future contributions, expected investment growth, and desired lifestyle. By comparing your projected portfolio to your retirement number using the 25x rule, you can estimate the age at which you can retire while maintaining financial security.
Will Social Security be enough to fund my retirement?
Social Security benefits can supplement your retirement income, but they rarely cover all expenses. Benefits depend on your earnings history and the age you begin claiming. Waiting until age 70 maximizes payments, while early withdrawals reduce them. Many retirees use Social Security alongside savings and investments to meet their financial goals.
Conclusion
Calculating your retirement number requires careful analysis of expenses, savings, investment growth, inflation, Social Security benefits, and taxes. By applying strategies such as the 25x rule and the 4% withdrawal guideline, and by accounting for changing expenses and inflation, you can create a realistic retirement plan tailored to your lifestyle. Starting early and maintaining consistent contributions, while periodically reassessing your projections, will help ensure your golden years are financially secure and enjoyable.
