How Much Do I Need to Retire? Running Your Numbers

"How much do I need to retire?" is the most common question in personal finance, and the most difficult to answer. The real answer isn't a number; it's a framework. Here's how to calculate your personal retirement number and understand the assumptions behind it.

The Quick Rules of Thumb

Financial planners offer various shortcuts. None are perfect, but they provide useful starting points:

These are useful for quick estimates but miss crucial personal details. Let's build a better framework.

Step 1: Estimate Your Retirement Expenses

Forget the 80% rule. Your retirement expenses depend on your lifestyle, not your salary. Some retirees spend more in early retirement (travel, hobbies); others spend less (no commute, paid-off mortgage).

Categories to consider:

• Housing: Mortgage/rent, property taxes, insurance, maintenance, HOA
• Healthcare: Premiums, deductibles, out-of-pocket, long-term care
• Transportation: Car payments, insurance, fuel, maintenance, travel
• Food: Groceries, dining out
• Utilities: Electric, gas, water, internet, phone
• Insurance: Life, umbrella, other
• Discretionary: Travel, hobbies, entertainment, gifts
• Taxes: Often forgotten but significant

Practical tip: Track your current spending for 3-6 months. Then adjust: subtract work-related expenses, add healthcare costs, modify based on your retirement vision.

Step 2: Identify Your Income Sources

Retirement income typically comes from multiple sources:

Guaranteed income:

• Social Security: Check your estimate at ssa.gov. Remember: claiming age dramatically affects your benefit.
• Pensions: Increasingly rare but valuable. Know your options (lump sum vs. annuity, survivor benefits).
• Annuities: If you own any, know the payout timing and amounts.

Portfolio income:

• 401(k)s and IRAs: The bulk of most retirement savings.
• Taxable brokerage accounts: Flexible but taxable.
• Roth accounts: Tax-free withdrawals.

Other income:

• Part-time work: Even modest income reduces portfolio withdrawals significantly.
• Rental income: If you own investment property.
• Inheritance: Don't count on it, but include if certain.

Step 3: Calculate the Gap

The "gap" is the difference between your expenses and your guaranteed income. Your portfolio must fill this gap.

Step 4: Apply the Withdrawal Rate

The "4% rule" suggests you can withdraw 4% of your portfolio in year one, then adjust for inflation, with high confidence of lasting 30 years.

To find your number: Divide the gap by your withdrawal rate.

Gap: $25,000 ÷ 0.04 = $625,000 needed

Withdrawal rate considerations:

• 4% is historical. It's based on past market returns. Future may differ.
• Earlier retirement = lower rate. Retiring at 55 with a 40-year horizon? Consider 3.5%.
• Flexibility matters. If you can cut spending in bad years, higher rates may work.
• Guaranteed income helps. More guaranteed income = less sequence risk.

Step 5: Factor in Healthcare

Healthcare deserves special attention because it's so expensive and unpredictable:

• Before 65: If retiring before Medicare, budget $15,000-$30,000+ per year for coverage.
• Medicare at 65: Plan for $5,000-$10,000+ per person per year (premiums, supplements, Part D, out-of-pocket).
• Long-term care: The average nursing home stay costs $100,000+/year. Insurance, self-funding, or Medicaid?

Many retirement plans fail because healthcare costs were underestimated. Build in buffers.

Step 6: Run Multiple Scenarios

A single number gives false precision. Reality involves uncertainty. Model multiple scenarios:

Variables to stress-test:

• Market returns: What if returns are 5% instead of 7%?
• Inflation: What if inflation averages 4% instead of 2.5%?
• Longevity: What if you live to 95? 100?
• Healthcare costs: What if you need long-term care?
• Social Security cuts: What if benefits are reduced 20%?

Monte Carlo simulations run thousands of scenarios with randomized returns to estimate your probability of success. Aim for 80-90% success rates; 100% means you're likely over-saving.

Step 7: Identify Your Levers

If the numbers don't work, you have levers to pull:

Save more: Increase contributions, especially catch-up contributions after 50.

Work longer: Each additional year provides more savings, fewer withdrawal years, and higher Social Security.

Spend less: Reducing annual expenses by $10,000 reduces your needed portfolio by $250,000 (at 4%).

Relocate: Moving to a lower-cost area can dramatically reduce expenses.

Part-time work: Earning $20,000/year in early retirement reduces needed portfolio by $500,000.

Delay Social Security: Waiting until 70 increases benefits by 76% compared to 62.

Sample Calculation