How much do you need to retire? For that matter, how much does anybody need to retire these days? If you’re not quite reaching retirement age yet, you may not have even thought much about how much you’ll need someday.
So, we’ve done some in-depth research and put together a few facts directly related to the subject and whether you can retire with anything from one to two, or even five to ten million dollars, or whether you could possibly get by on far less and how.
How Much You’ll Need
The actual amount of money that you will actually need to retire comfortably will vary depending on your individual circumstances, like your age, expenses, income, and retirement goals. However, a good rule of thumb is to aim to have enough savings to replace 70 to 80 percent of your pre-retirement income. Not so easy but not impossible, so we’ll get into that a bit later.
What Studies Show
A number of recent studies have been performed regarding the retirement needs of Americans by some highly-respected and trusted organizations. Here are some stats about retirement from the Federal Reserve Economic Data (FRED) database, the Employee Benefit Research Institute (EBRI), and the Federal Reserve Survey of Consumer Finances, just to name a few.
- 46 percent of Americans expect to still have debt when they retire.
- 12 percent of employed Americans (17.5 million people) are not contributing enough money to acquire a full match from their workplace retirement plan, therefore they’re simply leaving money on the table.
- 64 percent of Americans anticipate having to keep on working after retirement.
- 7 percent of Americans think that they’ll never stop working.
- 57 percent of Americans who expect to keep working after they retire stated that they would work because they’d definitely need the money but 44 percent said that they’d just get bored if they didn’t.
According to a recent Northwestern Mutual study, the average American firmly believes that they’ll need $1.27 million to retire comfortably. However, the median retirement account balance for Americans is only $89,300. Unfortunately, that means that most Americans are significantly undersaving for their eventual retirement.
Factors That Affect How Much You Need
It’s important to remember that inflation will undoubtedly erode the purchasing power of your money over time. This means that you’ll need to ensure that your retirement savings are invested in a manner that'll keep up with inflation. There are also a number of other factors that can greatly affect how much you’re going to need for retirement, including your current:
- Age: The younger you start saving, of course, the more time your money has for growth.
- Expenses: Your expenses will probably decrease when you retire, but you’ll still need to cover all of your basic living expenses, like food, healthcare, and housing.
- Health: If you have any health problems, you might have to budget for significantly more expensive healthcare costs when you retire.
- Income: The higher your income is now, the more you’ll need to save to maintain your standard of living when you retire.
- Investment returns: If you invest your money wisely, you may be able to generate more income, allowing you to do a lot more enjoyable things when you retire.
- Longevity: If you’re lucky enough to live a very long life, you’ll definitely need to save more money to ensure that you have enough to cover all of your expenses for those additional years.
- Retirement goals & desired lifestyle: Are you planning to travel, volunteer, or perhaps pursue other hobbies when you retire? These activities can increase your expenses, so you’ll have to factor them into your overall retirement planning.
Where You Retire Matters
Most retirees need at least $1 million to retire with what’s considered to be an average lifestyle in 28 out of 384 U.S. metro areas. California’s San Francisco and San Jose, as well as Honolulu, require considerably more. And, the fact is that the top five most expensive states to retire in are California, Hawaii, Massachusetts, New Jersey, and New York. So, what areas are the cheapest?
Well, the good news here is that there are a number of places where you would need much less to retire. In fact, it could even be less than half as much. They include:
- Jackson, TN (less than $500,000 for retirement).
- Danville, IL (just over $500k needed)
- McAllen, TX (just over $500k needed)
- Brownsville, TX (just over $500k needed)
- Pine Bluff, AR (just over $500k needed)
Overall, Southern and Midwest states require the lowest amount of retirement funds, as compared to Western states. So, although you might not be planning on packing up and moving when you retire, you might want to start considering it, especially if it could cost you as much as half as much. This guide can be a good starting point, however the states listed are not sorted by retirement costs.
How Many Millions Are Enough?
Now, many retirees probably won't even be lucky enough to have a million bucks for their retirement, however, just in case you fit into the million dollar retirement club, here's the difference between the various enviable levels of being a millionaire when you retire.
Obviously, the more the better, as is always true when it comes to the elusive green stuff, but we thought it would be rather interesting and informative to do an in-depth comparison of the levels of those beautiful “Ms”.
$1 Million vs. $2 Million
The amount of extra things that you could do with $2 million in retirement money compared to $1 million depends on several factors, including your health, lifestyle, and location. However, in general, with $2M to retire on, you'll of course have a lot more flexibility and options than with just $1M.
For example, with $2M you could naturally afford to travel more, eat out more often and at nicer restaurants, donate more money to your favorite charity, or take up some new hobbies (maybe golfing, skiing, or even sailing your own boat).
You could also afford to hire help with doing things like cleaning and yardwork, which could also free up your time to do other more enjoyable things. Additionally, you’d be less likely to have to ever worry about running out of money during retirement, thereby giving you more peace of mind.
More Examples of $1M vs. $2M in Retirement Savings
Of course, these are only a few examples of what you can do with your money but it will, of course, vary depending on your individual circumstances. However, having a larger retirement nest egg does give you more options and flexibility, which can be a valuable thing. Clearly, with $2 million in retirement savings, you’ll be able to do a lot more, including:
- Living a more luxurious lifestyle because you’ll be able to stay in nicer hotels when you travel, eat at nicer restaurants really often, or even take much more expensive vacations.
- Being more generous with your money could mean donating to worthy causes, offering a helping hand to your family and friends, or even leaving a larger inheritance to your heirs.
- Retiring earlier could mean spending a lot more time doing the things that you really enjoy doing, like pursuing new hobbies, spending time with family and friends, and traveling the world.
- Taking more risks with your money by investing in somewhat riskier investments, like stocks and bonds or cryptocurrencies, or maybe even starting your own business.
Of course, there can also be a few potential drawbacks to having a bigger retirement nest egg. For example, with $2 million, you could be more likely to overspend or make some risky investments.
Ultimately, of course, the big decision of whether or not to aim for $2M in retirement savings rather than just $1M is a personal one. However, the extra security and flexibility that can come with a larger nest egg can be well worth the extra effort.
$5 Million vs. $10 Million
Now, it goes without saying that if you retire with $10 million on hand, (wouldn't that be great?), then you’ll have significantly more options than with just $5 million (not too bad either). You’d be able to do the following (if you want to that is):
- Buy a bigger boat or perhaps even a yacht or a private plane,
- Buy a second home in a nice warm climate,
- Reno or refurnish your current home,
- Join an exclusive private club,
- Leave a lot more money to your heirs,
- Send your grandchildren to private school,
- Start your very own charitable foundation,
- Start the business that you've always wanted to start,
- Take a year-long vacation to travel around the world.
What If You Have a Lot Less For Retirement?
If you find that you're not going to get anywhere close to the millionaire retirement savings bracket, and you’re worried about whether you’ll even have enough money to retire at all, remember that not only is it important to start saving early but also to get some professional financial advice to help you estimate how much money you’ll need and create a viable retirement plan.
However, although millions would be so nice (right?), there are a few excellent methods for getting going now on the road to a relatively comfortable retirement. So, let's look at some of them.
Tips For Boosting Your Retirement Savings
Just as the required amounts needed for a comfortable retirement tend to vary, so do the ways of reaching your goals in that area. However, a good financial advisor can assist you with better determining how you can reach those goals based on your particular circumstances. But, for now, here are a few tips to help you get started:
Tip number 1:
Start right now rather than putting off investing and saving for retirement. The earlier, the better, because you’ll have the power of compounding your money on your side.
Tip number 2:
Don’t sacrifice saving for retirement until you’ve become debt-free. Instead, figure out a budget that allows you to tackle both of those goals, even if it’s not quite as much as you may want in either of the two areas.
Tip number 3:
Take advantage of employer matching if your employer offers it (for your 401(k) for example). Remember, it’s actually part of your employee compensation package, so when you don’t take advantage of it, you’re just leaving your money on the table.
Tip number 4:
Know the limits because, you may not know it but in 2022, the IRS increased the 401(k) contribution limit to $20,500 per year. If you’re unable to contribute the full amount, try putting in enough to get your employer match.
Then, formulate a plan to automatically increase your contribution by one-half of one percentage point (or even better, one full percentage point) either every six months or annually. And, don’t forget that, if you’re 50 years old or older, you can contribute even more to your retirement accounts via what’s called “catch-up contributions”.
Tip number 5:
Put your savings on autopilot because it’s a really easy way to ensure you actually do save. You can divert a chosen amount of money from your paychecks directly to your retirement accounts (and other investment accounts). That way, you won’t even miss it because it’s gone before hitting your checking account and getting spent.
Tip number 6:
Take a closer look at your taxes to ensure you’re taking advantage of all of the available tax credits related to retirement savings, especially if you happen to be a lower-to-middle-income earner. You might be even able to get a 50 percent of your retirement contributions tax credit.
Tip number 7:
Consider a health savings account because it can be a great tool for not only paying for your health care expenses now but also saving more money for your retirement. And, the money that you put into your HSA is pretax, and you can withdraw it tax-free during retirement for paying for your medical expenses.
In closing, it goes without saying that we'd all like to retire with millions to spare, however, it may not necessarily be in the cards. The best methods of saving for retirement will, of course, be based on your individual circumstances. But, don't forget that a trusted professional financial advisor can assist you with the task of assessing all of your options and developing a plan that's right for you.