How Much You Need for Retirement Depends on These 4 Factors

How much money do you need for retirement? You hear large numbers quoted all of the time that make retirement planning seem intimidating and out of your reach. The amount of money you need isn't a blanket number, though. Your own individual circumstances define how much money you need in retirement. These four factors will help you figure out what your number is.

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1. Income sources in retirement

Many experts agree that you need about 80% of your pre-retirement income once you retire. You can reach this amount by combining different income sources, some guaranteed and some not. If you qualify for Social Security , you can include it as a guaranteed source.. Most companies now offer 401(k) plans that place the responsibility of retirement savings on the employee, but if you're one of the lucky individuals who can also depend on a pension, you can add that into your guaranteed income. You can include payments like part-time work during retirement and annuity income in your income source calculations as well. 

After adding up your income sources, determine whether they cover 80% of your pre-retirement income. If  not, your savings make up the difference. The more income sources you collect, and the higher their monthly value, the less you withdraw from your retirement accounts. If you are someone with very few income sources, the majority of your retirement income will come from savings. This means you'll need a bigger balance upon retirement than someone with a lot of income sources.

2. Expenses in retirement

You want your retirement income to cover all of your essential bills, but you've worked hard for so many years, and you'll want to have some fun in retirement, too! You deserve to spend money on things you enjoy; just keep in mind that the higher your expenses, the more money you need.

If you've paid off big bills like your mortgage and car loan and only minor bills remain, you can survive off a lower savings balance. If, however, you plan for an extravagant lifestyle in retirement, you'll want to start saving more now!

In the event you end up supplementing your income by withdrawing money from your retirement accounts, there is one withdrawal rate that experts widely agree upon. You should aim for a withdrawal rate of 4% or less each year -- no matter how big (or small) your expenses. 

3. Age at retirement 

Do you have a retirement age that you've dreamed of since you started working? It's important that you give this number some serious thought, even if it changes over time. Just remember that the younger you are when you retire, the more years of retirement income you need, and the more money you need to save.

The age you choose to retire also affects payments like social security. The minimum age at which you can collect Social Security is 62. Full retirement age is 66 or 67, depending on your birth year, and delayed retirement comes at age 70 . The longer you delay collecting social security, the greater your payments and guaranteed income sources.

4. How your investments are invested

Are you a conservative investor who prefers the safety of CDs and bonds? Or are you an aggressive investor with the majority of your investment portfolio invested in stocks? The expected rate of return on your investments differs based on how you invest which affects your ending portfolio balance. The more stock exposure you have, the higher rate of return you can earn. If you don't have a lot of stock exposure, the majority of your account growth comes from your contributions which means you'll need more of them to make up for your lower investment return.

Between 2006 and the first quarter of 2020, large-cap stocks have earned an average annual return of 8.19%, and investment-grade bonds 4.79% . With a $100,000 investment, this 3.4-percentage-point variance in returns equals a $108,516 difference in portfolio balance over the 14-year period . 

If you're an aggressive investor, make sure that you're invested that way because you feel comfortable with the risk -- not because you're playing catch-up with your retirement assets. The latter can land you in a lot of trouble if the markets crash and your risk tolerances and investment objectives don't match. No matter how conservatively or aggressively you invest, you should reevaluate your exposure to stocks annually, especially as you near retirement. 

Retirement is one of your most important milestones. Your retirement experience is as unique as you, not a cookie-cutter number. The amount of money you'll need in retirement doesn't have to be a scary number; in addition to these four factors, retirement income calculators can help you with your retirement planning. With some careful thought, hard work, and early planning, reaching your number is possible -- and completely within your control.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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