Quick Answer: There is no universal number that works for every retirement. The right target depends on your expected annual expenses, when you plan to retire, and how much of those expenses will be covered by Social Security, a pension, or other income. A more useful starting point is your expected expenses, not a round number you have seen quoted elsewhere. |
Why "Magic Number" Advice Falls Short
It is common to hear a specific figure cited as the amount everyone should aim to save for retirement. The problem with any single number is that it assumes a lifestyle, a retirement age, and a set of expenses that may have nothing to do with yours. A number that is more than enough for one person's retirement may fall well short for another, depending on where they live, how they plan to spend their time, and what other income they can rely on.
A Framework: Start With Expected Expenses, Not a Savings Target
Rather than starting with a savings target, it is generally more useful to start with what your retirement is likely to cost on an annual basis. That includes essential expenses (housing, healthcare, day to day living) as well as discretionary spending (travel, hobbies, the kinds of experiences you are planning your retirement around). Once you have a reasonable estimate of annual expenses, you can work backward to a savings target that supports them.
Accounting for Multiple Income Sources
Very few retirees rely on savings alone. Social Security, a pension if you have one, part-time consulting or teaching income, and any other resources all factor into what your savings actually need to cover. Two people with identical savings balances can be in very different positions in retirement depending on what else is supporting their income.
Estimate your expected Social Security benefit based on your earnings history and anticipated claiming age
Factor in any pension income, including from a previous employer if applicable
Consider whether any part-time work, consulting, or research income is likely to continue into retirement
Revisiting Your Number as Retirement Approaches
Your expense estimate and your income sources will both become clearer as retirement gets closer. It is worth revisiting this framework periodically rather than calculating it once early in your career and assuming it still applies decades later.
Frequently Asked Questions
Is there a rule of thumb for how much I should have saved?
Rules of thumb can be a helpful starting point for a conversation, but they rarely account for your specific expenses and income sources. Treat them as a rough check, not a final answer.
How do I estimate my retirement expenses if retirement is still far away?
Start with your current expenses and adjust for what is likely to change, such as no longer having a mortgage, potentially higher healthcare costs, and any new discretionary spending like travel.
Should my savings target change over time?
Generally yes. As your expected retirement age, expenses, and other income sources become clearer, your target should be recalculated rather than left as a fixed figure from years earlier.
About the Author David Wheatley, CLU® ChFC®, is a Senior Partner and financial advisor at Tidewater Wealth Management in New Haven, Connecticut. He specializes in retirement planning for higher education professionals and physicians, with more than 30 years of experience in tax-efficient income distribution and estate strategies. Investment advisory services provided by NewEdge Advisors, LLC doing business as Tidewater Wealth Management. |