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How Much Money Do I Need To Retire?

The main question that people have when it comes to their retirement finances is: 

How much money do I need to have saved when I retire?


The question itself is simple enough. Unfortunately, the answer isn’t so simple. There is no one-size-fits all solution that ensures you’ll have a comfortable retirement. In fact, there are several different theories. Some of the most popular "rules of thumb" are:

  • You should have 10-12x your annual income saved.
  • Shoot to replace 70-80% of your pre-retirement income during retirement.
  • $1 Million dollars is the “magic number” to have saved.
  • Just plug in your information to an online calculator and that’s the number you need to save to.

While these suggestions act as helpful baselines, none of them are exactly correct for you and your unique financial situation. These figures lack one key ingredient it takes to give you your perfect retirement savings recipe: context. You’re saving for the retirement YOU want – and that’s going to look different from person-to-person.

Sometimes it’s nice to keep these generalized benchmarks in mind to give you an idea of where you stand in relation to retirement preparedness, but they certainly aren’t set in stone.


The Reality of Retirement Planning


Retirement planning is much more complex than these go-to “magic numbers” let on. If you step back and consider all the variables involved, you’ll see why. These are some questions that I suggest people consider when we’re creating a retirement plan:

  • How much money will you spend each year in retirement?
  • How old are you right now, and how long will you live?
  • What will inflation be – and how will that impact your savings and the cost of living during your retirement years?
  • How will the markets perform?
  • What income sources will you have during retirement? How much will that income be?

And these questions barely scratch the surface of what we’ll need to go over when putting together your ideal retirement plan! Your life is complicated and full of a wide range of financial variables, personal goals, values, and more. Your retirement plan should reflect these things – which is why there is no single answer to the retirement savings question.


Making a Plan


Many people ask the How much do I need to save? question because they’re focused on their income and asset accumulation. This isn’t a bad thing to be focused on. The more you save, the closer you’ll be to a comfortable retirement. However, that isn’t the only thing you need to be focused on. It’s not even the most important piece of the puzzle.

When you’re making your retirement savings plan, the most important thing to consider is:

How much you’ll be spending during retirement. 


Its pointless to calculate how much savings you’ll need if you don’t understand what it will cost you to live as a retiree.


Spending Trends in Retirement


There are several theories about how retirees spend their money – and how much they spend. The first theory comes from Michael Stein, author of The Prosperous Retirement: Guide to the New Reality. Stein suggests that there are three retirement phases: the Go-Go Years, the Slow-Go Years, and the No-Go Years

3 Retirement Spending Phases

  • During the Go-Go Years (between ages 59-75), retirees are at their maximum spending potential. They’re traveling, eating out more, and their spending is keeping pace with inflation.
  • The Slow-Go Years (between ages 75-85) mark a decrease in spending. This is mostly due to seniors becoming less active during this time of their lives.
  • The No-Go Years (ages 85+) indicate a notable drop off in spending. Many seniors may not have any discretionary expenditures at all, and their budget will be self-limited.

However, it’s important to note that while discretionary spending may decrease during the No-Go Years, health-related costs usually increase. This idea is reflected in David Blanchett’s “Spending Smile” theory. His theory is that a retiree’s discretionary spending slowly decreases over time, but once they hit a point their other costs increase (health-related expenses are the primary factor here). Eventually, the increased health-related costs outweigh the decreased discretionary spending – meaning retirees are spending as much or more than they did during the Go-Go Years at the beginning of their retirement.

Retirement Spending Smile Trend


What Do These Spending Trends Mean for You?


If you’re like most people, you plan to live a long and happy life. That’s a good goal to have. You need to account for your longevity when you’re creating your retirement plan – ignoring it would be taking on a huge risk.

The reality is that people are living longer. In the 1900s the average life expectancy was 49 years old. In 2013, it was 79 years old. That’s a huge increase in longevity – and it’s probably going to continue growing as medical science improves, and as our society’s values evolve to focus on a healthier lifestyle.

As you create your unique retirement savings plan, make sure that you’re calculating in the expectation of a long and happy life. That means accounting for potentially high health costs as you age (per the Spending Smile theory) and for an increased length of “Go-Go Years” as you’ll probably continue to be active and in good health long after you retire. Of course, nobody can truly know how long you’re expected to live – but I recommend using this life expectancy calculator to get a benchmark idea.

Retirement planning is complicated, and is often a source of financial stress. You can run through all the calculations and spreadsheets you want, but life is still full of surprises. You will have a curveball thrown your way, and no amount of guesswork savings can prevent that. This is why I encourage you to view your financial planning as an ongoing process, not a one-time event.

Working with a CERTIFIED FINANCIAL PLANNER™ who focuses on assisting pre-retirees and retirees organize their finances can be a huge help to you. They’ll be able to help you create a unique plan that fits your needs, and make ongoing adjustments as needed. If you’re interested in discussing your retirement plan, give me a call at (785) 256-9150or schedule your FREE initial consultation today. I’d love to hear your concerns, and to help you get on the right track to be financially prepared through your retirement years.


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Desmond Henry, a financial planner in Topeka, KSDesmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.