Retirement needs are highly individualized based on your desired lifestyle. For some, this could mean retiring in a condo in Florida, and for others this could mean downsizing your home to accommodate your new monthly budget.
Regardless of your unique goals, a good rule of thumb is to save enough to sustain your current lifestyle after you retire. But this amount can change depending on several factors.
How much do I need to save to retire?
A good rule of thumb is that your retirement income should equal about 80% of your pre-retirement income, says Steve Sexton, financial consultant and CEO of Sexton Advisory Group, a retirement-planning company.
“For example, if you make $150,000 per year, you should aim to have at least $120,000 per year in retirement to live comfortably in your golden years,” says Sexton.
But some retirees may choose to live a more frugal or a more lavish lifestyle in retirement. Depending on which route you want to take, the factors that may increase or decrease your savings goal include:
Social security benefits. Beginning at age 62, you can begin receiving partial Social Security benefits in the form of a monthly payment. This amount is reduced by a percentage of your payment; the percentage amount is based on the year you were born.
For instance, someone born in 1950 who elects an early benefit would have their payment reduced by 25%. On the other hand, someone born in 1970 would have their benefit reduced by 30%.
Once you reach your full retirement age, you can begin receiving your full Social Security benefit. If you delay your benefit until reaching this age, you may also get delayed retirement credits, which increase the amount you receive. Your monthly payment may reduce how much money you need to withdraw from your retirement savings.
Pension plans. During your working years your employer may opt to make contributions toward a pension plan to fund your retirement, which is paid either in a lump sum or a set monthly payment for life. This additional income in retirement may reduce your retirement savings withdrawals and delay collecting social security.
Part-time employment. If you plan to continue working during retirement, any supplemental income may reduce your need to withdraw from your retirement savings. This also may help you avoid taking your Social Security benefits early.
When you plan to retire. Retiring before your full retirement age reduces the amount of Social Security benefits you receive if you choose to accept them early. You also may have to withdraw from your retirement savings early, which increases the overall amount of savings needed to retire.
If you retire after reaching your full retirement age, you have additional time to continue saving toward retirement. If you delayed accepting your Social Security benefits, you may be eligible for an increased monthly payment since you have earned your delayed retirement credits. As well, you are delaying withdrawing from your retirement savings, so you may be able to reduce your overall retirement savings goal.
Desired lifestyle in retirement. Most retirees live on a fixed income, which is typically less than the amount they earned while working full-time. If you plan to continue living the same lifestyle into retirement, you should consider additional ways to supplement your income.
Health or medical conditions. People aged 65 and older are eligible to apply for Medicare, which is a federal health insurance program for older adults, as well as some younger individuals with disabilities and dialysis patients.
Typically, Medicare is less expensive than private health insurance. But certain Medicare programs lack coverage that other private insurers may cover. “Remember that you’ll also need to budget for bigger health care costs to accommodate more frequent health conditions as you age,” says Sexton—which increases your overall retirement savings needs.
Retirement savings by age
Time is a powerful tool to increase your savings since your dollars have a longer time horizon to compound interest. If you have the funds available, it’s important to start saving as soon as possible to give your money time to grow.
To determine if you are on the right track to reach your retirement savings goal, Fidelity created a breakdown of how much you should have saved at each stage of your life.
View this interactive chart on Fortune.com
Here’s an example of what this savings plan could look like over your lifetime. Assuming you have a starting salary of $50,000, your retirement savings goal would be $500,000 at retirement.
View this interactive chart on Fortune.com
Retirement savings by salary
An alternative option to having a specific dollar amount savings goal by age is to save between 12% to 15% of your annual salary each year starting as early as possible, according to Vanguard.
This percentage may include an employer match. For instance, let’s say your employer offers a 5% match on your retirement contributions and you earn $50,000 annually. If you set aside 7% of your income ($3,500) and your employer matches your contribution up to 5%, then you will have saved 12% of your income.
How to calculate retirement savings
You can also use online calculators to determine how much money you should have saved at each age. These calculations can take factors into consideration that a chart may not, such as withdrawals from your retirement savings or unexpected market conditions.
Here are a few online calculators that are available to use.
Social Security benefits. The Social Security administration has a benefit estimate calculator, which estimates your earnings based on self-provided information.
Full retirement age. The Social Security administration created a full retirement age calculator to help you determine when you are eligible for your full social security benefit.
Retirement savings needs. You can calculate how much you need to retire based on your age, income, investment returns, and inflation.
How long will my retirement savings last?
Ideally, your savings should be enough to provide a future stream of income to sustain a 30-year retirement phase, says Sexton. But if you don’t have enough saved by the time you retire, making your savings last may require some lifestyle adjustments.
Ways to make your savings last longer during retirement
Follow the 4% rule. The first year you retire, the rule suggests you can withdraw up to 4% of your retirement savings. Then in the second year, you withdraw the 4% plus a cost-of-living adjustment, which is equal to the rate of inflation. This adjustment is made in each additional year and is added to the previous year’s withdrawal.
For instance, let’s say you have $500,000 in your investment portfolio. In the first year, you can withdraw $20,000. If inflation increases by 2.5% in the second year, you can withdraw $20,500 ($20,000 x 1.025) to cover the increased cost of living. Going forward, you will continue to multiply the previous year’s withdrawal by the current year’s inflation rate to determine your annual withdrawal limit.
Plan for unexpected expenses. “Unexpected expenses happen throughout life, including retirement—which is why it is incredibly important to have an easily accessible emergency fund that covers a minimum of six months’ worth of expenses,” says Sexton. This additional savings will also prevent you from pulling additional funds out of your retirement in the case of an emergency.
Avoid fees on retirement savings. Beginning at age 70, you may be required to make a minimum withdrawal from your individual retirement account (IRA) to avoid paying additional fees. This withdrawal is known as a required minimum distribution, or RMD.
Reduce expenses. If you find yourself coming up short to pay your expenses, you may need to reconsider your shopping habits. Some ways to reduce your discretionary spending include saving money on grocery trips or canceling unnecessary monthly subscriptions.
Work part-time. Your retirement savings and Social Security benefit may not be enough money to cover your full retirement needs. In this case, you may want to consider taking on a part-time job to earn additional income.
It’s important to note that if you retire before your full retirement age and continue working, your Social Security benefit may be reduced if you make more than the annual income limit. In 2022, the income limit is $19,560 if you have not reached your full retirement age, or $51,960 in the same year you will reach full retirement age.
Downsize your home. Your mortgage payment might have been affordable while you were working full-time, but in retirement this amount might exceed your monthly budget. You may be able to downsize to a smaller home and reduce your expenses.
The takeaway
When determining your savings goal, you should consider your ideal retirement lifestyle—and whether your current habits will allow you to set yourself up for financial safety in the long run.
"Something that often gets overlooked in financial and retirement planning discussions is cultivating a healthy relationship with money,” says Sexton. “This is crucial to developing positive financial habits, which ultimately will impact your retirement.”
