How Much Money Do You Need to Retire?

The Primary Question for Retirement Planning

Sooner or later everyone will need to start preparing for their financial retirement. The better you plan, the better your retirement will be.

The primary financial question when preparing for your retirement is in regards to how much money you need to be able to comfortably retire.

Before you can know how much you need to save, you first need to select your retirement strategy. Therefore, this becomes a three step process. First, you must pick the strategy that is best suitable for you. Secondly, you must determine how much of a yearly budget you want to give yourself to spend each year. Then, thirdly, the math for how much you need to save becomes crystal clear.

Step 1: Select Your Withdrawal Rate

Our website is filled with withdrawal strategies to help you withdraw as much money as possible from your savings without it drying up.

The most common strategy is the Four Percent Rule. Not only is it a durable system, but it also helps you get a general picture for what a reasonable savings goal is. It does this by shining a light on what your budget would be in relation to your savings.

The withdrawal rate in the Four Percent Rule, is 4% of your savings, hence the name. So, if your savings total was $1,000,000 then your budget would be 4% of that, which is $40,000.

This percentage is called a Safe Withdrawal Rate, because it is deemed a safe percentage to withdraw from your portfolio without it depleting your funds before the end of your retirement, as long as you stick to the rules of the strategy.

Other strategies use different rates and rules. For example, a more fiscally conservative minded investor, might go with a lower withdrawal rate, such as 3%, in order to be even safer. An investor with a higher appetite for risk, or a shorter time horizon due to age or life circumstances, might go with a more aggressive rate rate such as 4.5% or 5%.

Whichever strategy you choose, they will all start out with an initial withdrawal rate, usually between 2%-5%, that will give you something to shoot for when setting a savings goal.

Step 2: Set Your Desired Yearly Budget

In order to know how much money you need to retire, you will first need to know how much money you plan to spend each year in retirement while you are living off of your savings.

Obviously, we would all like a limitless budget, but you will have to set your sights on something that is realistic if you want a realistic savings goal to shoot for.

On the flip side, you don't want a budget so constrained that you will not be able to have any financial elbow room.

Once you have a comfortable and realistic budget set in your mind, you can then combine your strategy selection with your desired budget in order to see how much you need to save.

Step 3: Calculate Your Savings Goal

Once you have a withdrawal rate selected, you can then combine that rate with your preferred yearly budget to determine the amount of money you would need to save to make this plan work.

The math for this is simple. If you are using a 4% withdrawal rate, simply multiply your yearly budget by 25.

So, if your desired yearly budget is $70,000 then multiply $70,000 by 25 to get a needed savings of $1,750,000.

If your withdrawal rate is something different then four percent, then you would divide your yearly budget by the withdrawal rate as follows:

Savings Goal = Yearly Budget / Withdrawal Rate

So, if you choose 3% as your safe withdrawal rate, and you want a budget of $60,000 then you would divide $60,000 by 0.03 to get a savings goal of $2,000,000.

Other Income Sources

One other thing to note is that the budget that you get from your safe withdrawal strategy should be applied on top of other income sources.

These other income sources would be from things like social security or pension income.

Therefore, the withdrawals from your investment portfolio would be bonus money on top of your other income sources.

So, if you want the budget in your retirement to be $70,000 per year, you would need to save up $1,750,000 with the 4% rule. But, if you plan on having $30,000 from other income sources, like social security, then you would only need to provide an additional stream of $40,000 to get to $70,000 per year. Withdrawing that $40,000 only requires a portfolio of $1,000,000 which is $750,000 less than the original calculation.

Quick Reference Tables

The following tables give you a quick reference for what your budget and savings would be with some popular SWRs (safe withdrawal rates):

Savings Needed
Yearly Budget4% SWR3.5% SWR3% SWR

Bonus Step: Calculate Your Yearly Budget from Your Savings

So far we have calculated your savings goal by combining your withdrawal rate with your yearly budget.

The math can work in reverse, as well. You can calculate your yearly budget by combining your withdrawal rate with your savings.

Following the below formula to get to your yearly budget from your savings amount:

Yearly Budget = Savings Goal * Withdrawal Rate

So, a portfolio of $2,500,000 with a safe withdrawal rate of 4% would mean that you could afford a yearly budget of $100,000 (2,500,000 * 0.04 = 100,000).

Savings Plan: Easier Said than done?

You might assume that the math is a whole lot easier than the actual process of saving your money. This is true.

It is, indeed, easier to plan than it is to follow through. But, it is a whole lot easier to follow through if you have a good plan in place.

One of the most popular and most effective plans to get your savings where they need to be is Dave Ramsey's "The Total Money Makeover." If you are looking for a place to start, this could be the best resource to grow your savings to where they would need to be to implement a safe withdrawal retirement strategy. (Note: As an Amazon Associate I earn from qualifying purchases from the above link to the book.)

To get a more in depth picture of how this looks over time, use our Safe Withdrawal Rate Calculator which will give you all the numbers you need to plan your perfect retirement.