How Much Do I Need to Save for Retirement?


Just the fact that you're looking at this page means you are on the right track. Believe it or not, no matter how many people preach about retirement savings, most people don't give the topic much thought at all. If I had to guess, I'd say a good majority of folks begin getting nervous around the 50 year mark. They look at their savings and wonder how they're going to live for the rest of their lives after they retire. I can tell you that turning 50 years old and just beginning to concern yourself with your retirement savings is a recipe for disaster. Whoever is in this situation is looking at many more working years than they had planned on. I knew one woman who was forced to work until she was 90 years old. Can you imagine that?

Required retirement savings can vary widely. If you're living in the center of NYC, San Fransisco, or Los Angeles, and have a lifestyle that costs tons of money, then you're most likely going to need a lot more savings than someone who is living alone in a shack in the mountains of Maine. The costs of living in these areas is like night and day. So while one person may require $75,000 per year to go on all their vacations and pay all their bills, another person may only require about $8,000 per year to hang around their shack. Some people want to purchase huge RVs to travel around the United States. Other people enjoy a simple day of fishing down at the stream. So really, there is no absolute rule that one must follow when it comes to retirement savings. You'll need as much as you need.

The question is though, how much do you need to save before you turn 65 years old to supply you with the necessary funds you'll need to survive every year thereafter? Here's the deal - it's called the 4% rule. Here's how it works:

Let's say you've managed to save up $1 million dollars by the time you turn 65 years old and retire. In your first year of retirement, you'd withdraw 4% of those investments and use them as funds for living. That would be $40,000. The next year, you'd withdraw 4% of your total investments, but this time, you'd account for inflation as well. So if inflation rose by 2%, you'd withdraw the $40,000 (if you had a remaining balance of $1 million) and you'd tack on 2% of the $40,000, which would be $800. So in that second year, you'd withdraw a total of $40,800 to live on. You would continue this every year thereafter.

Now, you may be asking yourself, "Won't I run out of money quickly if I do this? It seems like $40,000 is a big chunk of $1 million." I'd say, yes, it is. But you need to remember that your investments will continue to grow during your retirement. Any money you withdraw may be replaced during the year, so it's not a big deal. If your investments grow steadily, you may actually replace that $40,000 during the year, allowing you to start at the beginning every single year. If you follow this rule, it's highly probable that you won't exhaust your savings in your lifetime, if you assume that will be 30 additional years after the retirement age of 65.

Now, obviously this 4% rule can't apply to all situations every single year. If the market crashes, you'll need to adjust. If your expenses rise, you'll need to adjust. If you don't need to withdraw as much every year, then don't. This rule can seem somewhat rigid, but it's your job to figure it out as you go along. Don't stick to something like this if it's not working out perfectly. Make modifications.

Let's make a few calculations for different needs. Let's say you need a certain amount to live each year. I'll do the math below.

You need $10,000 per year to live. You'll need to save up $250,000. ($10,000 / 4% = $250,000)

You need $20,000 per year to live. You'll need to save up $500,000. ($20,000 / 4% = $500,000)

You need $30,000 per year to live. You'll need to save up $750,000. ($30,000 / 4% = $750,000)

You need $40,000 per year to live. You'll need to save up $1,000,000. ($40,000 / 4% = $1,000,000)

You need $50,000 per year to live. You'll need to save up $1,250,000. ($50,000 / 4% = $1,250,000)

What does all this tell you? It says that you'll need a lot more money than you thought you'd need to retire comfortably. If you take your age and look at your retirement savings, I have a feeling that you'll realize you're falling short. If this is the case, I advise you to take this issue seriously and to begin hustling in a big way. Also, you should never retire with a mortgage or any debt. Figure that out now too. Get completely out of debt before you turn 65. Don't make excuses for this. I can go on and on about this, but I'll spare you the agony of that. Let me just tell you that if you think you don't make enough money to get yourself out of debt and you've got a cell phone, drop the phone service. If you've got cable TV, get rid of it. If you eat fast food, stop. Drink coffee, you don't anymore. Again, I can go on and on, but I won't. Just look at all the areas you waste money in your life and change your behavior.

If you've got any questions about saving for retirement, please ask. I'd love to help.