Ask 100 people how much money they'll need for retirement, and you'll get 100 different answers.
Some might think as little as $100,000 will do it. And yet others think they need $1 million, $2 million or more. And a surprising number of people probably can't even hazard a guess.
"Everyone's answer is going to be different," said Andy Rosen, investing expert at personal finance site NerdWallet. The truth is, no one really knows what their precise number is.
Calculating How Much You Need For Retirement
There are so many variables that go into computing how much you'll need to save and to live on each month once you stop earning a paycheck.
What age will you quit working? How lavish a lifestyle will you lead? Is your mortgage paid off? When will you tap Social Security? Will you work part-time. How long will you live? The list of questions to ask yourself goes on and on.
All the uncertainty about how much is enough was spotlighted by a recent IBD/TIPP poll. Folks were asked "How much do you think you need to have saved for retirement?" Respondents' answers ranged from "Under $100,000" (18%) to "Over $2 million" (7%). And nearly two out of 10 (18%) threw up their hands and said "Not sure."
Map Out Your Retirement Savings Goal
Despite the fuzzy math, you want a ballpark number so that you know where you're at and can map out a plan to help you reach your goal, says Rita Assaf, VP of retirement and college products at Fidelity Investments.
Fidelity estimates that you'll need to cover 80% of your annual income in retirement. That's why Fidelity recommends you save and invest at least 15% of your pretax annual salary (including company matching contributions). And, if you can't afford that much, try to boost your savings rate by a percentage point each year until you reach your savings goal.
"Small (savings) increases can make a big difference over time," Assaf said.
To help future retirees get an idea of what they must save to fund their retirement, there are a few basic rules of thumb to follow.
Save 25 Times Your Estimated Annual Expenditures
How much you need to save has a lot to do with how much you will spend in your golden years. That's why NerdWallet's Rosen says you should save roughly 25 times your planned annual spending in retirement.
So, let's say you need to generate $30,000 in annual income from your portfolio. The math works like this: 25 x $30,000 = $750,000.
"What we're trying to do is play the averages," Rosen said.
In coming up with a ballpark number, there are things you can control: things like the size and cost of your house, how long you'll work, and how much you spend on entertainment, travel and dining out. "You can play with your costs," Rosen said.
What you can't control is the growth rate of the economy or what returns you'll get in financial markets.
Save X Times Your Annual Salary By A Certain Age
Fidelity's rule of thumb focuses on age-based savings milestones that are tied to your salary.
The mutual fund company recommends that you aim to save at least one times your salary by age 30, three times your pay by 40, six times by 50, eight by 60, and 10 times your salary by age 67.
It's a guidepost. Not a number etched in stone.
The math looks like this: If you just turned 50 and earn $100,000 per year, you should have an estimated $600,000 saved in your 401(k) and other retirement accounts. And if you're earning $150,000 by your retirement age at 67, you should have roughly $1.5 million saved, according to Fidelity's savings guidelines.
Control Your Retirement Savings Variables
The biggest factors that will impact your personal savings goals, Assaf says, are the age you retire and how you want to live in retirement. Retirees must also price in an expected rise in health care costs as they age, as well as the impact of inflation on their purchasing power.
"It's good to know what you think your retirement number will be," Assaf said.
When it comes to retirement saving, it helps to take an aspirational approach, she adds. That means trying to imagine what retirement will look like. Do you see yourself owning a beachfront-view home and going out to dinner every night? Or staying put in a cheaper home and eating in?
"Envisioning what you think you'll be doing in retirement helps to bring it to life," Assaf said. "And that makes it slightly easier to think it through" and save appropriately.
If you're curious about your retirement readiness, you can get a quick snapshot using "The Fidelity Retirement Score." Answer six simple questions to find out if your savings are "on target" or if your account balance "needs attention."
"It's just a gauge of where you are and what will help you reach your goal," Assaf said.
The key to retirement readiness is to invest intelligently.
"You want the right mix of stocks, bonds and cash depending on how far you are from retirement and how comfortable you are with taking risk," Assaf said. "You want to make sure your portfolio is not too conservative or too aggressive."
Calculate How Much Your Monthly Life Costs
Focusing on a lump-sum number that you'll need for retirement is the wrong number to focus on, argues Chad Willardson, founder of Pacific Capital and author of "Stress-Free Money."
"Oh, I've saved up $2 million and that means I'm going to be fine because I have that magic number in my head — that's fantasyland," Willardson said.
Instead, Willardson says the real number to focus on is how much your life now costs on a monthly basis. Because that's how much you'll probably need in cash flow to pay all your bills in retirement.
"Look at how much money is coming out of your checkbook each month, and don't forget your credit cards," Willardson said. Look at your checkbook over the past 90 to 180 days and come up with an average per-month cost. That number is the monthly nut you'll likely have to fund in retirement.
Looking At Monthly Costs
Let's say you need $10,000 a month to live. Next, figure out where that money is coming from. The first place to look is what Willardson dubs "mailbox money." This is income you have coming in no matter what each month. Think Social Security, pension payments, and annuity or rental property income.
"Whatever is left over, that's the income gap you have to fill with your investments," Willardson said. So, if you have $5,000 coming in each month in "mailbox money," you need to generate $5,000 in income from your 401(k) and IRA.
Willardson prefers that the income from your portfolio also comes from fairly guaranteed income streams, such as interest on savings, bond coupons and dividend-paying stocks. The question to ask, said Willardson, is "How reliable is that income? Because it's still going to be about the cash flow your investments are producing."
What every retiree really wants is optionality.
"The more money you save, the more options you have," said NerdWallet's Rosen.
