Justin Cupler

Contributing Writer at Tally

Retirement is a big deal — it’s the day you can finally walk away from work and enjoy the rest of your life on your terms. Retirement can also be a source of stress with so much uncertainty surrounding the question: “How much money do you need to retire comfortably decades into the future?”

Don’t let the stress get the best of you. With a few quick formulas, you can get a grip on how much you need to enjoy those retirement years comfortably.

Below, we’ll go through all the key calculations and the many variables associated with them to help you find that perfect retirement savings goal, whether you’re planning a traditional retirement or early retirement.

What the experts say about retirement savings

There are many ways to calculate how much retirement savings you need to live comfortably in your golden years. But there are a few that have stood the test of time — with the data to back them up.

The million-dollar (or more) approach

Many experts say between $1 and $1.5 million will be more than enough. Other experts feel you need a little more, which is an opinion shared by 1,000 different 401(k) account holders surveyed by Charles Schwab.

The 10-year income approach

Other experts prefer to look at your income to see how much retirement savings you’ll need. These experts suggest saving 10-12 times your current annual income for retirement. So if you earn $100,000 per year, you should have $1-$1.2 million saved in a 401(k) and other retirement accounts.

The 80% income approach

Other experts say you’ll need about 80% of your yearly income to cover your retirement expenses. So if you earned the same $100,000 per year, you would need to be able to draw $80,000 per year from your retirement savings every year you’re retired without depleting your nest egg.

Using the 4.5% annual withdrawal rule (formerly the 4% rule), this would put the required savings at $1.8 million. The 4.5% rule says, on average, a retiree can withdraw up to 4.5% of their retirement savings balance per year to cover expenses without depleting their savings.

To come up with your retirement number using this approach, multiply your income by 0.80, then divide that number by 0.045.

For example: $100,000 x 0.80 = $80,000 and $80,000/0.045 = $1,777,777.78

So you can see how much variation there is between these different approaches. Both are good guidelines to consider as you develop your approach to saving for retirement. Because everyone’s financial situation varies, you’ll need to take a close look at your specific situation to see how much you need to retire comfortably.

Consider cost of living

While looking at your annual income will give you a rough idea of how much retirement savings you need, looking at your monthly expenses and then converting them to annual costs is a more accurate way to determine whether or not you’ll have enough savings to last through your retirement.

Sorting out your cost of living is relatively simple. Just create a monthly budget that lays out all your expenses and multiply that monthly number by 12. If you spend $5,000 per month, your annual expenses would add up to $60,000. Of course, you will also want to add in the less frequent expenses, such as yearly costs to file your taxes or register your car.

Make sure you include every expense, including any cash you set aside for travel, entertainment, dining out and more.

You’ll also want to add in yearly inflation to make sure your retirement income can keep up with price increases. According to Trading Economics, inflation is projected at 1.9% in 2020. So, for every year you’re working toward retirement and for each year you live in retirement, you’ll want to add 1.9% to the previous year’s number.

For example, if your expenses are $60,000 this year, they would become $61,140 next year, $62,301 the following year, $63,485 the year after that, and so on. If you only have a few years until retirement, you could do this with a calculator, but if you have a lot of years to add up, Vertex42’s inflation calculator can ease the process.

Carrying your mortgage into retirement

One variable to consider when looking at your cost of living is your mortgage. Will your mortgage be paid off before you reach your anticipated retirement age? If so, great — you can leave that off your monthly calculations. But if you’re in a situation where it won’t be paid off, you have some decisions to make.

You can continue your current retirement savings path and carry your mortgage into retirement. In this case, you’ll need to keep your mortgage in your annual expense estimates. Alternatively, you can choose to slow your retirement savings and roll that cash into paying off your mortgage early.

To determine the better route for you, you’ll want to consider the potential interest gained by continuing your retirement savings versus the interest you’ll pay on your mortgage. As of February 2020, the average 30-year fixed-rate mortgage runs 3.6% APR, while the average return on the S&P 500 — the largest, most stable 500 stocks in the New York Stock Exchange — is 12.25% since 1923.

Of course, you won’t always see over 12% return, but it is a good gauge to use for determining if it’s better to repay your mortgage early or keep investing. Considering this is an 8.36% swing in the positive if you continue investing, it will generally be in your best interest to keep paying your monthly mortgage payment as you head toward and enter retirement.

One exception is if there’s a recession that results in big investment losses. At this point, it may be beneficial to stop investing and roll your cash into extra house payments. Once the stock market starts rebounding, you can shift back to investing. The interest savings will not be huge, but they are better than taking losses on investments.

Number of years in retirement

The next step takes a lot of honesty, as you must determine just how long you plan to live in retirement. Yes, it may seem morbid to consider your own death, but the last thing you want is to exhaust your retirement savings too soon.

Unless you have a chronic illness that could potentially shorten your life expectancy, the average American lives to 79 years old, according to The World Bank. This is, of course, just an average, and many variables affect this.

The Social Security Administration offers a deeper dive with its life-expectancy calculator that takes into account your current age and gender. Using this as a rough estimate of how long you need your retirement savings to last, you can better calculate the savings you need to live a comfortable life in your golden years.

Combining Social Security with retirement savings

Social Security benefits are a hot topic for upcoming retirees. The recent doom and gloom surrounding the solvency of this retirement safety net have left some soon-to-be-retired folks wondering if it’ll be around when they finally stop working.

According to Forbes, the Old-Age and Survivors Insurance Trust Fund, the account that Social Security retirement income is paid from, will hit $0 in 2034. Fortunately, when this fund dries up, the taxes flowing in from the workforce at the time will keep the checks flowing, but the SSA estimates this incoming cash will only cover about 80% of the retirement benefits from 2035 onward.

You can get your estimated Social Security retirement income from the SSA retirement estimator, which uses past and anticipated future income to determine what your Social Security payments will be in retirement. Simply fill out the form and enter last year’s income on the next page, and it’ll calculate your estimated benefits in today’s dollars at three different years, depending on your current age.

Why three years? The first year is the youngest age you can claim retirement benefits from the SSA, but you’ll only get 70% of your monthly benefit — the percentage goes up each year you delay retirement.

The second year is your full retirement age, which is when you get 100% of your monthly benefits.

The third year is your maximum benefit if you remain in the workforce beyond 65. If you wait until after full retirement age to retire, SSA will give you a larger monthly benefit that increases by a fraction of a percentage point each month you delay. The peak percentage for delaying depends on when you were born.

Keep in mind that the SSA bases this estimate on today’s dollar, so while this is more accurate because it’s based on past IRS records, you’ll want to use the SSA’s quick calculator and check the “Inflated (future) dollars” option to get your future benefits.

If you plan to retire after 2035 or you plan for your retirement to last beyond 2035, make sure to deduct 20% for the expected benefit reduction due to funding issues. For example, if your expected retirement benefit at 67 years old is $3,000 per month, and you plan to retire after 2035, your actual monthly income from Social Security would be $2,400 per month.

Putting it all together

Now it’s time to take all your current numbers together to get an estimate of how much you need to have a comfortable retirement.

Let’s assume you’re a 25-year-old male who makes $50,000 per year, has $3,000 per month in expenses and plans to retire at 67 years old.

The first step is to look at how long you should expect to live in retirement. According to the SSA life-expectancy calculator, by the time you hit 67 years old, your life expectancy will be 87 years.

The next step will be to determine your expenses in retirement. By 87 years old, your expenses will have gone up to $9,636.53 per month, using the inflation calculator set at 1.9%. That adds up to $115,638.36 per year.

Now, let’s give you a little relief by adding your anticipated Social Security income. According to SSA’s quick calculator, if you received periodic raises that matched inflation, your full retirement benefit would be $8,551 per month. Remember, though, you will only see about 80% of this, so that drags the number down to $6,840.80 per month.

Deducting your Social Security income from your projected monthly expenses leaves you with $2,795.73 per month to cover with retirement savings, which is $33,548.76 per year.

Here’s a quick review of the numbers:

Age: 25

Annual salary: $50,000

Monthly expenses: $3,000

Anticipated retirement age: 67

Anticipated monthly Social Security income (accounting for inflation): $8,551

80% of social security income: $6,840.80

Required annual withdrawal from retirement savings: $33,548.76

Now, we’re to the point where we can get a firm number for your retirement savings. Though there has been recent pushback against it, the rule of thumb for annual withdrawals from your retirement savings to cover living expenses is 4.5%.

According to the 4.5% rule, if you have $1 million in savings, you can safely withdraw up to $45,000 per year.

Using the 4.5% guideline, you can calculate your required retirement savings by dividing $33,548.76 by 0.045. This would give you a total of $745,528 in savings to live comfortably in retirement with 80% of your expected Social Security benefits taken into account.

If you prefer not to rely on Social Security and lean only on your retirement accounts, you would divide your full $115,638.36 in yearly expenses at 87 years old by 0.045 to arrive at $2,569,741 in savings to have a comfortable retirement.

Here are the numbers at a glance:

Required annual withdrawal from retirement savings: $33,548.76

Annual withdrawal rate from retirement savings: 4.5%

Total retirement savings needed with Social Security: $745,528

Total retirement savings needed without Social Security: $2,569,741

Plan high, plan low or fall in the middle

As you can see, figuring out the amount of savings you need to retire comfortably results in a range instead of a precise number.

Find the number you’re comfortable with and start saving toward that today. And don’t fear mild adjustments over the years.

To get a better grip on your retirement savings, you can see where your 401(k) stands in relation to others in your age group. This will let you know if you need to ramp up your savings or if you’re ahead of the curve.