How Much Do You Really Need for a Comfortable Retirement?

As people near retirement, a common question they might ask is “How much do you really need for a comfortable retirement?” In other words, how much should be saved and invested to live comfortably by the time you retire?

Key takeaways

• Determining retirement needs: The amount needed for a comfortable retirement varies based on factors such as cost of living, lifestyle, debts, and investments outside of retirement funds.
• Start planning for retirement early: Starting your retirement planning early is one of the best decisions you can make for your financial future. The sooner you begin, the better prepared you’ll be to achieve your retirement goals and enjoy a comfortable and secure retirement.
• Calculating retirement portfolio: A common method to estimate the retirement portfolio needed is by multiplying expected annual expenses by 25, assuming a 4% annual withdrawal rate.
• Rule of thumb: Another rule of thumb suggests having about 10 times your gross income by retirement age, usually around 65 years old.
• Global Perspectives: Actual amounts needed for retirement vary across countries and regions. Organizations like ASFA in Australia and Loughborough University in the UK provide estimates based on living standards.
• Recommendations for US citizens: Fidelity suggests aiming for retirement savings and investments around ten times your pre-retirement income by age 67 to live comfortably.
• Options for insufficient savings: If retirement savings are inadequate, options include downsizing, renting out spare rooms, selling unused items, or continuing to work part-time.
• The 4% Rule: The 4% rule, based on the Trinity Study, suggests withdrawing 4% of the retirement portfolio annually to sustain retirement for at least 30 years.
• Wealth protection: Protecting retirement wealth involves creating and stress-testing a retirement plan, considering various contingencies, and transitioning to lower-risk assets closer to retirement.
• Early retirement considerations: Retiring earlier than age 65 may require adjusting withdrawal rates. Withdrawing 3% annually, instead of 4%, can theoretically sustain retirement indefinitely but requires a higher initial retirement portfolio balance.

The answer to how much you need to comfortably retire can vary significantly because it depends on several factors. These include your cost of living, which depends on the country and region you live in, your lifestyle, whether you will have any debts, and whether you have investments outside of your retirement fund and if so, the types of investments.

Another question that you should ask yourself before retirement is “Am I on track to reach at least this amount?” This article should help you find the answer to these questions!

Estimating how much you will need in your retirement portfolio

Before you retire, it is important to determine how much you will need in your retirement fund and other investments, or retirement portfolio, to live comfortably during retirement.

The amount required is calculated based on your expected annual living expenses during retirement, the tax rate on withdrawals from the retirement portfolio, and brokerage and taxes on the sale of shares. Assuming an annual withdrawal rate of 4% of your total retirement portfolio balance (see below for details on the 4% rule and the assumptions used), the amount required at retirement can be calculated from the following equation.

Value of retirement portfolio at retirement
= Expected annual living expenses x 25

Example: Bill and his wife Bev expect to have total monthly living expenses averaging $5,000, which equates to annual expenses of $60,000. The value of the retirement portfolio that they would need at age 65 will be $60,000 x 25 = $1,500,000. Note that this assumes no income from other sources such as social security, rental income, royalty income, or other forms of income. If you live in a country that provides retirees with social security such as an age pension, the amount required in your retirement portfolio will be less than this. However, you can treat this additional amount as icing on the cake. Why not save the amount recommended, plus receive more for an even better retirement?

Another simple rule of thumb to calculate how much you will need in your retirement portfolio is to have about 10 times your gross (before-tax) income by retirement age, commonly 65 years old. If Bill and Bev each earn $70,000 per year in gross income before they retire, their combined pre-tax income will be $140,000 per year. They would need ten times this amount, equating to $1,400,000, in their retirement fund to pay for their expected living expenses. This is close to the amount calculated in the example above.

When should I start planning for retirement?

The short answer to when you should start planning for retirement is, “as early as possible.”

The longer answer is when you start earning income and are in a position to start building a retirement portfolio. This is typically in your late teens or early twenties.

Planning for retirement early is crucial for ensuring financial security and peace of mind in your later years. Here’s why it’s essential to start planning as soon as possible:

1. Compound interest: Starting early allows you to take advantage of the power of compound interest. By investing your savings early, you give your investments more time to grow, leading to significantly higher returns over the long term.
2. Long-term goals: Retirement planning is a long-term endeavor. Starting early gives you more time to set clear financial goals, develop a savings strategy, and make adjustments along the way to stay on track.
3. Risk management: Early planning provides you with more options for managing financial risks. You have time to diversify your investment portfolio, adjust your asset allocation based on your risk tolerance, and build up emergency funds to weather unexpected expenses.
4. Financial flexibility: Planning early allows you to make gradual adjustments to your lifestyle and spending habits, ensuring a smoother transition into retirement. You can also explore different retirement income streams and savings vehicles to maximize your financial flexibility.
5. Health considerations: Planning for retirement early enables you to consider potential healthcare costs and insurance needs as you age. By addressing these concerns early on, you can better prepare for any medical expenses that may arise during retirement.
6. Reduced stress: Finally, early retirement planning can significantly reduce financial stress and uncertainty later in life. Knowing that you have a solid financial plan in place can provide peace of mind and allow you to focus on enjoying your retirement years to the fullest.

Starting your retirement planning early is one of the best decisions you can make for your financial future. The sooner you begin, the better prepared you’ll be to achieve your retirement goals and enjoy a comfortable and secure retirement.

Actual amounts needed to retire comfortably based on where you live

Note: The following details are current as of March 2024. Actual amounts will differ depending on the age you plan to retire and the retirement lifestyle you desire.

Australia

The Association of Superannuation Funds of Australia (ASFA) has calculated estimated budgets and superannuation balances to live either comfortably or modestly in retirement in Australia. The figures assume that the retiree(s) own their own home and that the budgets relate to expenditure by the household.

As of March 2024, to retire with a comfortable lifestyle in Australia a couple between the ages of 65-84 would live off a budget of $72,660 per year and require a combined superannuation balance of $690,000 at the age of 67. Likewise, a single person between the ages of 65-84 would live off a budget of $51,630 per year and require a superannuation balance of $595,000 at the age of 67.

For a modest retirement lifestyle in Australia, a couple between the ages of 65-84 would live off a budget of $47,390 per year and require a combined superannuation balance of $100,000 at the age of 67. Likewise, a single person between the ages of 65-84 would live off a budget of $32,915 per year and also require a superannuation balance of $100,000 at the age of 67.

More recent estimates and details on how these numbers are calculated are provided by ASFA, with updates made available on a quarterly basis.

United Kingdom

Researchers at Loughborough University Centre for Research in Social Policy have created The Retirement Living Standards, which were developed to help individuals picture what kind of lifestyle they could have in retirement.

The standards provide examples of what a range of common goods and services would cost for three different living standards: minimum, moderate and comfortable.

As of January 2024, minimum living standards would cost about £14,400 for a single person and £22,400 for a couple. Moderate living standards would cost about £31,300 for a single person and £43,100 for a couple. Finally, comfortable living standards would cost about £43,100 for a single person and £59,000 for a couple.

The retirement living standards figures above can be entered into the second part of the calculator below (in the ongoing expenses section) to estimate how much you will need at retirement.

United States

Fidelity Investments states that the typical US citizen should expect to spend between 55% and 80% of their current income annually during retirement. They recommend building up retirement savings to around ten times your pre-retirement income by age 67 to live comfortably.

Estimate how much you will need with our calculator

Do you know how much you might need to spend at retirement and how much you would like to spend each year of retirement? Use our calculator below to estimate how much you will need to save and invest by retirement.

Note: This retirement calculator assumes a constant inflation rate up to and during retirement. It also assumes a constant earning rate from your retirement portfolio throughout retirement. These rates can change significantly from year to year. The default values are typical long-term averages. The result from this calculator is an estimate only.

My retirement portfolio is lower than recommended. What options do I have?

If your retirement portfolio balance is significantly less than what is suggested above, there are a few options you can consider. Apart from government assistance where available, these include:

• If you have a family home with unused rooms (your children have moved out and have homes of their own), you could downsize to a more reasonable home or apartment. Smaller homes usually cost less to maintain and are cheaper on heating and cooling costs. The extra money can go towards the retirement fund.
• You could rent out a spare room in the house if it is a suitable option. This would be easier to manage if it has a separate bathroom and kitchenette for example.
• Sell unwanted furniture, tools, or other items that you no longer use or need. Or have a garage sale.
• Continue working if you can. Look for paid work in fields that suit your interests and capabilities. Even part-time or casual work 1 or 2 days per week can help bring in income that could be used to help pay for bills or groceries.

Protecting Your Wealth

Once you have built wealth over many years to secure a comfortable retirement, you should look at protecting it to minimize losses.

It is one thing to build wealth. It’s a different thing to maintain and protect wealth. Some tried and tested advice to protect your wealth include:

• Create and stress-test a retirement plan. It is recommended to do this when you are in your 30s so that you have time to correct and adjust if needed. But better late than never!
• Factor all the contingencies you can think of in your retirement plan. What if things cost more than expected by retirement? Healthcare, an unexpected illness, reduced interest rates on savings accounts, and poor stock market returns are some contingencies to consider.
• Transition to lower-risk assets such as cash, bonds, and fixed-interest assets as you get closer to retirement. This will help to reduce the impacts of market volatility.

The 4% rule: what is it and how does it work?

The 4% rule was developed during the Trinity Study^[1]Cooley, Philip L.; Hubbard, Carl M.; Walz, Daniel T. (1998). “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable” (PDF). AAII Journal. 10 (3): … Continue reading, which set out to determine safe withdrawal rates from retirement portfolios. This study was conducted by three professors of finance at Trinity University, San Antonio, Texas, in 1998. In simple terms, it states that if you withdraw 4% of your retirement portfolio each year, you can live off that portfolio for at least 30 years.

It should be noted that the Trinity Study is based on a few assumptions. These include:

• The retirement portfolio consists of a mixture of stocks and bonds.
• 4% is based on the portion of the stock portfolio withdrawn in the first year. Subsequent withdrawals increase at a rate equal to the CPI.
• The portfolio should last for at least 30 years. If a person retires at age 65, there is a good chance that their portfolio will last until they reach at least 95 years old.

What if I want to retire earlier?

If you plan to retire earlier than the usual age of around 65, then withdrawing only 3% can, in theory, last forever based on the Trinity Study. However, you would need a significantly higher amount in your retirement portfolio to provide the same standard of living. In this case, Bill and Bev would need close to $2 million in their retirement portfolio ($60,000 x 33 = $1,980,000) to withdraw $60,000 in their first year compared with $1,500,000 if they withdrew 4%.

Do you use other methods to determine how much you will need in your retirement portfolio? Are you living comfortably in retirement? Leave a comment below to share your experiences!

Final thoughts

Planning for a comfortable retirement involves careful consideration of various factors such as your lifestyle preferences, expected expenses, and potential sources of income.

By estimating your retirement portfolio, exploring different saving and investment strategies, and adapting as needed, you can work towards achieving your retirement goals.

Remember to regularly review and adjust your plans as circumstances change, and seek professional financial advice to ensure you are on track for a fulfilling retirement.

FAQs

1. What factors influence the amount needed for retirement?

The amount needed for retirement can vary based on factors like your cost of living, lifestyle choices, debts, investments outside of retirement funds, and where you plan to retire. Different regions and countries have varying living standards and expenses.

2. Why is it important to start planning for retirement early?

Starting your retirement planning early allows you to take advantage of compound interest, set clear long-term goals, and manage financial risks more effectively. It also provides you with the flexibility to adjust your savings strategy and address potential healthcare costs, ultimately reducing stress and ensuring a more secure retirement.

3. How do I determine how much I need for a comfortable retirement?

To determine how much you need for retirement, consider factors such as your expected annual living expenses, potential debts, lifestyle preferences, and any additional income sources. You can use methods like multiplying your annual expenses by 25 or aiming for around 10 times your pre-retirement income as starting points.

4. What if my retirement savings are insufficient?

If your retirement savings fall short of the recommended amount, consider options such as downsizing your home, renting out spare rooms, selling unused items, or continuing to work part-time. These strategies can help boost your retirement funds and ensure a more comfortable retirement.

5. What is the 4% rule, and how does it work?

The 4% rule is based on the Trinity study. It suggests withdrawing 4% of your retirement portfolio annually to sustain retirement for at least 30 years. This rule provides a guideline for determining a safe withdrawal rate that balances income needs with portfolio sustainability. It should be noted that it is a rough guide and not necessarily suited to everyone.

6. How can I protect my wealth during retirement?

To protect your wealth in retirement, create and stress-test a comprehensive retirement plan, factor in various contingencies like unexpected expenses or market downturns, and gradually transition to lower-risk assets like cash, bonds, and fixed-interest investments as you approach retirement age.

The following books provide more detailed information on the topics covered in this article. Feel free to browse through this list and support the site by making a purchase at one of our affiliate partners. Please read our affiliate links disclosure for more information. Note: The links below will open in a new browser tab or window.

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• The 5 Years Before You Retire: Retirement Planning When You Need It the Most by Emily Guy Birken Link*
• Retirement Planning For Dummies by Matthew Krantz Link*
• Retirement Made Simple by Noel Whittaker Link*

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