When gauging how much to save for retirement, many people come up with an aspirational number in their head as the finish line: “I’ll know I’m ready when I have a million bucks” or something like that. While estimating a dollar amount is part of the puzzle, there’s much more to it than that.
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GOBankingRates spoke with a retirement planning expert who broke down the complexities of estimating and anticipating financial needs in retirement. Here’s what you need to know.
Meet the Expert
Marty Burbank is an estate planning and elder law attorney and the founder of OC Elder Law. He is a Forbes featured expert in estate planning and elder law and was recognized by the Orange County Register as one of the 100 most influential people in Orange County, California, for his work helping seniors and veterans plan for their financial futures.
He currently serves on the boards of the Vanguard University Foundation, Alzheimer’s Orange County and the Roosters Foundation. He is the past president of the Fullerton Rotary Club and past chair of the North Orange County Chamber of Commerce. During his 12-year Naval career, he served as the Critical Care Department senior petty officer at Balboa Naval Hospital and as a medical deep-sea diver.
Today, he concentrates on keeping retirees above water with their finances.
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How Much Is Enough? Finding Your Nest Egg Number
In terms of the dollar amount needed to retire, not only isn’t there one number for everyone, there isn’t even one number for you that isn’t likely to change with your life circumstances, health, family situation, market conditions and economic ups and downs.
“Determining when you’ve saved enough to retire is multifaceted and highly individual,” Burbank said. “It involves not just calculating your current savings and projected expenses but also considering potential healthcare costs, inflation rates and unexpected life events.”
Even so, the first step is to estimate what you plan to spend each year to live the life you want in retirement.
Calculating Annual Expenses: The 80% Rule
According to the AARP, “The rule of thumb is that you’ll need about 80% of your pre-retirement income to maintain your lifestyle in retirement, although that rule requires a pretty flexible thumb.”
But that’s probably an unnecessarily ambitious goal.
According to Epic Capital Wealth Management, most retirees can probably get by with significantly less than 80% for four reasons:
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Retirees can stop funding their retirement accounts.
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Retirees stop contributing to Social Security and Medicare through payroll taxes.
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Retirees don’t typically have a daily commute or the associated expenses.
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People often retire into lower tax brackets.
Fidelity says most retirees should plan for as little as 55% to 80% of their annual pre-retirement income.
Building a Nest Egg Big Enough To Last: The 4% Rule
Once you’ve estimated your annual retirement expenses, another traditional standard can help you gauge how much you’ll have to save to make that possible.
The 4% rule says retirees can make their nest eggs last for 30 years by withdrawing 4% of their savings in the first year of retirement and then adjusting their subsequent annual 4% withdrawals for inflation.
For example, if you earned $50,000 the year before you retired and used the 80% rule to estimate expenses of $40,000 per year in retirement, you’d need a $1 million nest egg because $40,000 is 4% of $1 million.
In the first year, you would withdraw $40,000. If the inflation rate were 2%, you’d withdraw $40,800 in the second year and then use that as the base for the third year’s inflation-adjusted withdrawal — and so on.
There are, however, many variables and considerations that can throw that satisfyingly neat formula into chaos. According to Charles Schwab:
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The rule is highly inflexible and puts more weight on inflation than market performance.
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The rule assumes a specific portfolio allocation of 50% stocks and 50% bonds.
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The rule is based on historical market performance.
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The rule assumes your portfolio will last 30 years.
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The rule omits taxes and investment fees.
The Best Rule Is the One You and Your Advisor Tailor to Your Situation
The author of a Western Carolina University study that advocates for adapting the 4% rule to your individual situation wrote for the school’s college of business, “Instead of withdrawing a fixed percentage (adjusted for inflation) from the…
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