How Much Do You Need to Retire?

Picture your retirement lifestyle. Where would you like to live? Would you like to travel? Leave money to heirs? Reach these goals by taking a few steps.

Someone many years from retirement can focus on starting early and investing in tax advantaged, diversified, low-cost investments. Take full advantage if your employer provides matching contributions.

Someone 10 or so years away from retirement may want to crunch some preliminary numbers. This allows time to fine tune your retirement plan. There are different methods for estimating retirement income need.

Estimate Social Security

For each of these methods estimate how much you will receive from Social Security. If you have not done so already, open an account at This will give you access to your income history and personalized tools to estimate benefits.

If you are not ready to open an account, use the Social Security Quick Calculator at to make projections.

Yes, I know, Social Security is on a projected track for some trouble. This is projected to result in reduced benefits if no policy changes are made. A somewhat similar situation in the early 1980’s resulted in federal law changes that reformed the system.

Methods for Projecting Income Need

Wage Replacement Ratio. Conventional wisdom is to estimate retirement income need based on 70% -80% of current income. This factors that some expenses like FICA taxes and retirement plan contributions will go away. The first step is to calculate current income, factor in a growth rate, and then years to retirement. Next pick a replacement ratio, estimate average inflation rate, and years in retirement.

Example: Angela age 58, current income = $55,000 plans to work 10 more years and expects her salary growth to be 2% a year. Using that information, she calculates her final year’s salary will be $67,045 dollars. She uses a replacement ratio of 80% to calculate a first year in retirement income need = $53,636. She expects to be in retirement for 20 years and inflation to average 3% a year. Using those numbers, she will need $1,441,213. She projects that Social Security will cover 40% ($576,485) and she will need $864,728 from other sources.

25X Rule. A spin-off from the research of William Bengen. He calculated a person with a retirement portfolio consisting of 50% stocks and 50% bonds could have first year withdrawal of 4% of assets. In subsequent years withdrawals would be tweaked to consider inflation. The 25x rules was derived by taking the inverse of 4%. You estimate annual retirement income need and subtract the amount that will be covered by pensions and/or Social Security. Next you multiply the remaining income need by 25.

Example: Annual income need = $75,000; If Social Security covers $25,000. Need to generate $50,000 annual income from investments. So, would need 25 * $50,000 = $1,250,000.

Obviously, this rule is not exact. But it is a good way to start thinking of anticipated need, Social Security benefits, and existing retirement assets.

Actual Expenses. As a person gets close to retirement it can be more accurate to use actual expenses and then project for inflation and years in retirement.

Example: Angela estimates annual expenses for the first year of retirement = $40,000. She expects to live in retirement for 20 years and inflation to average 3%. Using those numbers, total needed = $1,074,815. If Social Security retirement benefits cover 40% ($429,926) then 60% ($644,889) would need to come from other sources such as retirement plans.

As you get closer to retirement – say a year or so before retirement – consider practicing by living on your projected retirement income.

What are Your Numbers?

These examples make broad generalizations. Once you consider your specific needs, budget, retirement assets, and current expenses, you can customize your plan.


Posted: July 29, 2021

Category: Home Management
Tags: Retirement Planning, Retirement Saving

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