Planning for retirement—how much money will you need?

Posted on April 13, 2021

While retirement may seem like an event in the distant future, now’s the time to nurture your nest egg so you can enjoy a more financially secure life later on. There is no magic number for how much money you’ll need for retirement, but many experts suggest that somewhere in the range of 60% to 80% of your working income is a good target to aim for. That means if your household income now is $80,000, you might need somewhere in the range of $48,000 to $64,000 a year once you retire. And remember, retirement could last 20 years or more. The reason there is no easy answer is that everyone’s needs are different, and they will change over time.

To help you get a better idea of what might be best for you, take a few minutes each year to think about your needs … and those needs will become clearer with age.

Will you still have big regular expenses, such as a mortgage, car payment or credit card bills?
What type of lifestyle do you want in retirement—big trips or small vacations? Expensive hobbies or working in a garden? A lot of entertainment or just an occasional night out?
How about medical expenses—will you need to pay medical insurance until you qualify for Medicare? What are your regular medication costs? Are you planning to buy long-term care coverage to help protect against the unexpected?

Once you have a good idea what your expenses and lifestyle goals will cost, you’ll need to look at your income sources.

What is your estimated Social Security income?
Have you been saving money in a retirement plan like a 401(k) or 403(b)? Do you have IRAs?
A big question in this category is always ‘Are you saving enough?’ The earlier you start and the more you set aside, the bigger that income source is likely to be in retirement.
Will you have a work pension you can count on for regular income in retirement?
Do you plan to work part time?

Once you have a good estimate of your expenses and target an age you’d like to retire at, you’ll be able to compare them to your expected income to see if you’re going to have enough. Can you meet your goals?

If you need to do some rethinking, the good news is that altering your spending needs a bit, saving a little more, or putting off retirement for a few years can help you reach your retirement goals.

Keys to budgeting in retirement

Once you've reached retirement, you'll need to budget and manage your money intelligently to keep your finances in order and ensure you maintain your path into retirement.

Create a reasonable spending plan—living in retirement means monitoring your spending and planning accordingly for inflation to ensure that your investment earnings and additional cash flow meet your needs. If you set goals you can’t meet, you’ll quickly become frustrated or you’ll create an extreme penny-pinching reality that you won’t enjoy. And what’s the point of retirement if you can’t enjoy it? Start by setting goals that are reasonable so you can watch yourself make progress.
Find an easy way to track your spending: Keep tabs on how you spend your money, but don’t feel like you have to track every single penny. If you’re able to see where your money goes each week or month, you’ll be able to analyze your spending more accurately. This practice is a great way to feel good about the progress you’re making while you adjust your spending plan and goals.
Work with your spouse or partner: It’s important to involve your significant other in this process so you both agree on the plan. Without cooperation, a spending plan can drive people apart because a lifestyle will be forced on one person without his or her input. It’s important to give each other some cushion as you implement this plan and get comfortable with its effects on your daily lives.

When it comes to investing for retirement, the two most popular choices are Traditional and Roth IRAs.

Traditional IRAs

Savings in a Traditional IRA are tax-deferred until the money is withdrawn, meaning you'll need to prepare for the tax implications for your withdrawals. Contribute until you reach 70 ½ years of age if you or your spouse has earned income included on your annual tax documents. At age 70 ½ , the IRS requires you begin taking annual minimum withdrawals from your Traditional IRA account, but you can start withdrawing penalty-free at age 59 ½ . Also consider there are penalties that come into play when you fail to take the required minimum distribution. Several factors, including your IRA account balance and projected life expectancy, go into determining what “minimum” means for you.

Roth IRAs

Contributions to your Roth IRA are taxed before they are invested, so generally, these withdrawals will be tax-free. But there are some exceptions. If your Roth IRA account is at least five years old and you’re over age 59 ½, you won’t pay taxes on your withdrawals. If you’re withdrawing money from your Roth IRA before you reach age 59 ½, you’re subject to a 10% early withdrawal penalty tax on the investment gains only. You never will be penalized for withdrawing the amount of your original contributions, no matter your age. The IRS also doesn’t require you to take annual withdrawals. As long as you have earned income being reported on your annual tax documents within certain thresholds based on tax filing status, you can contribute to a Roth IRA.