How do you figure out how much money you need in retirement?

Queue ticket

I had a little fun with our fictitious shopping trip on the luxury eBay. While I enjoy toys as much as anyone, I think the desire for ultra-rich luxuries seems less about desire for luxuries and more of a need to be seen by others as wealthy.

And I believe that the need to be seen as wealthy is one of the biggest contraindicators of actually being wealthy. (There, I just saved you from needing to read The Millionaire Next Door.)

So let’s not focus on all that. Let’s talk about what it takes to be fine, to be taken care of.

The idea of retirement is a such a difficult topic to broach, because it seems so huge. After all, there are few things in life that you can spend decades working on, and decades enjoying the benefits of. (Finding a partner and spending your life with them is about the only thing that’s coming to mind at the moment.)

So we’ve got to break it down. Because we’ve got a number we need to figure out.

You may know more than you think

(Note that in this post I talk about the perspective of a person who shares no income with anyone else, as this is the simplest case. Spouses and others who are sharing incomes will likely have an easier time of it than what I’ve described below.)

How much money you need in retirement is a personal decision, but the framework is the same for all of us.

If you’ve been following the program outlined here, you’re already creating a money plan. That is, every month you create a list of all of your income and a list of all of your bills and expenses (here’s a glossary), and you make them equal:

Income = Bills + Expenses

Adjustments to make

When you’re planning for retirement, you need to adjust these three categories in certain ways.

  • Income: Your wage-based income is going to go away. (That’s why we call it retirement.) In its place will be a few potential other income streams, such as Social Security, and retirement income. Since this is what we really want to find out, let’s come back to this later.
  • Bills: Unless you move, your gas and electric bills won’t change, and if you still rent or have a mortgage, that will be the same. But you may find that some of your bills may change. Are there monthly recurring payments that you’re making that are solely due to your working? And you won’t be putting money away for retirement anymore. Similarly, though less commonly, are there new bills that will arise because of you not working? That will have to be factored in too.
  • Expenses: This is where the bulk of the changes will happen, as expenses track daily life most accurately. Will you spend as much money on gas if you’re not driving to work every day? Probably not. On the other hand, might you be traveling a little more? Possibly. According to Fortune, people on average spent 23% less after they retired.
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Find your number

So some income might go up, but it’s more likely that it will go down. What does this mean?

It means that a good first calculation would be to figure out what your bills and expenses are today and determine your income needs from that. That, most likely will be an overestimate, which will work in your favor.

  1. Add up all of your bills, minus those that involve retirement or will be irrelevant in retirement.
  2. Add to this all of your expenses, again, except for those that won’t be relevant for retirement. This is your monthly income needs
  3. Take this number and multiply by 300 (ambitious) or 450 (conservative).

That final range is your target for how much you want to have socked away.

Example #1: Your bills and expenses are $3,000 a month. That means you optimally want to have between $900,000 and $1,350,000 saved up.

Example #2: Your bills and expenses are $6,000 a month. That means you optimally want to have between $1,800,000 and $2,700,000 saved up.


How did I get 300 to 450?

Well, your bills and expenses are monthly, so multiply by 12. Those expenses are post-tax, but our investments will be pre-tax, so I multiplied by 1.5 to get the approximate pre-tax amount. And since we’re assuming that we’re working with interest only, I assumed between 4% (conservative) and 6% (ambitious) yearly interest, so I divided by either 0.04 or 0.06.


12 × 1.5 ÷ 0.04 = 450
12 × 1.5 ÷ 0.06 = 300

(Check my work please, and if you’ve found a error in either math or reasoning, please let me know in the comments and I’ll update the post.)

Final thoughts

This is a total simplification, as it doesn’t take into account tax-advantaged accounts such as Roth IRAs, which will skew the numbers downward. Also, it assumes a constant interest rate, which can’t really be assumed.

But that’s not the point. The point is that when you have a number, even a vague one, it starts you on the right path. And it gets you off wrong ones, like thinking that you need $10 million or more to have a comfortable retirement. Your definition of comfort might be different from mine, but you probably don’t need that much. Thank heavens for that.

But enough about me. How do you come up with your retirement number?

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