This Is How Much Money You Really Need for Retirement

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How much money do you need to retire? $1 million is a pretty popular answer, and people often have a dollar amount in mind. One report from Northwest Mutual in 2023 found the average American believes they need $1.27 million to retire comfortably, and a separate survey by Schwab conducted around the same time found that Americans think they need $1.8 million.

While having a financial goal in mind can certainly help motivate you to save and invest wisely, I also think these surveys are asking the wrong question and are misleading Americans into thinking that their retirement "number" -- that is, the money they have in the bank -- is the most important factor in a comfortable retirement. It isn't.

The most important retirement "number"

Here's something financial planners know that many American workers often don't realize. It isn't necessarily about the amount of money you have saved. The most important number is how much income you can create after you retire.

Before we explore what this means, it's important to discuss how much income you'll need after you retire for a comfortable lifestyle.

The definition of a "comfortable" retirement varies from person to person. Some people plan to pay off all of their debts before retiring and live a relatively inexpensive lifestyle, while others can't wait to take expensive trips to places they've always wanted to see.

With that in mind, a general guideline is that you'll need about 80% of your pre-retirement income to maintain your standard of living. The idea here is that you won't have certain expenses you do now (such as IRA contributions, commuting expenses, etc.), so 80% is likely to give you the same amount of money to work with as you currently have. Of course, you can adjust this income requirement to fit your situation, but let's use this as an example. This means that if you have a $100,000 salary, you'll need about $80,000 per year in retirement income.

How much retirement income will you need from your savings?

The good news is not all of your retirement income will need to come from your savings. At the very least, you'll have Social Security, and if you aren't sure what to expect from it, you can create an account or log in to the Social Security Administration site and see an estimate.

You should also consider any pensions, annuities, or other sources of income you anticipate having, such as cash flow from rental properties.

Now it's time to do some basic math. Take your estimated total retirement income needed and subtract your other sources of income. Let's say that you will need $80,000 in annual income after retirement and will have $25,000 from Social Security and $10,000 from a pension. This means you'll need $45,000 in annual income from your savings.

How much money will you really need for retirement?

There's no perfect rule of thumb, but the often-used 4% rule of retirement says that you can comfortably withdraw 4% of your retirement brokerage accounts in your first year of retirement and increase this to keep up with inflation in subsequent years, without much fear of running out of money.

A quick mathematical trick to figure out how much you'll need in savings to produce a certain amount of income is to multiply the income you want by 25. Using the previous example of $45,000 of annual income needed from savings, this shows that you'll need $1,125,000 in retirement savings.

The bottom line

To be sure, the methods discussed here make a lot of assumptions, and you can tailor the formulas used to fit your situation. If you feel you need more income for a truly enjoyable retirement, factor that into your analysis. But the point is to get you thinking less about how much you want in savings, and more about how much income you want in retirement, and what you'll need to save in order to get it.

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