Updated on 02.17.17

How Much to Save for Retirement? Here’s How I’m Figuring Out My Number

Trent Hamm

Many people have no idea how much to save for retirement, and thus quite often they do whatever their retirement counselor suggests without actually knowing whether what they’re doing is right. I wanted to understand the full process better, so I spent some time figuring out what I would need for retirement and doing the math on it – no investment knowledge required.

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How old will I be when I actually start drawing retirement benefits? That’s a question you need to ask yourself. It’s not exactly the same as “when will I retire?” because, for example, I never plan to actually “retire” in the traditional sense. I will always have some sort of business or activity going until I’m literally incapable of doing anything at all. For me, though, I’m targeting age 62 to start getting out benefits.

How many years will I actually live after retiring? I used a life expectancy calculator to get a very thumbnail approximation of my age to start with. However, this number is flawed in a lot of ways – the younger you are, the more likely it is that medical techniques will extend your life. Plus, it’s only a rough number.

To account for medical advances, I take the number that calculator spits out (for me, it was 70), subtract my age from it, then round that number to the nearest 5. The number I got was 40. Then, divide that number by five, leaving 8, then add that to the age estimation, giving 78. Why divide this by five? The average life expectancy of an American over the last hundred years has gone up roughly a year for every five years that pass. The younger you are, the more likely medical advances will benefit you.

Since this is just an “average” estimation, I also add on half a standard deviation of the normal lifespan, which means add nine years to your earlier number to cover yourself if you exceed the statistical average of how long you should expect to live. This would bump me up to 87.

Then, take this final age calculation and subtract your retirement age from it. I want to “retire” at age 62 and start drawing my benefits, so that means I’ll have 25 years of retirement that need to be covered.

How far are you from retirement? Take the age you want to “retire” and subtract your current age, rounded to the nearest year. This leaves me with 34 years to retirement.

How much will you need your first year in retirement? I don’t believe that Social Security will be a factor at all in my post-retirement income, so I figure what I’ll need without it. My belief is that I’ll want 75% of my current salary each year in retirement, so how much will that be the first year I retire? If I make $50,000 now, 75% of that would be $37,500. Over the last two decades, inflation has been somewhere around 3%, so we also need to figure in 34 years of inflation (that’s how many years I need to retire). Using a basic compound interest calculator, with a current principal of $37,500, no annual addition, 34 years to grow, and an interest rate of 3%, I get a value of $102,446.45. That’s how much I’ll need the year I retire to have 75% of the value of my salary today. Wow.

How much will you need during your whole retirement? Since my investment will still be growing at retirement, I figure that I just need the first year’s dollar amount for the number of years I’m in retirement. That would be $102,446 times 25 years, or $2,561,161. I have 34 years to get there.

How much can I afford to put away? If at all possible, you should always put away the maximum amount that you can into your retirement plan; that way, you don’t absolutely need spectacular returns in order to retire. For me, I can put away up to 15% of my salary ($50,000) into a retirement plan, so I put away $7,500 each year.

What retirement plan do I pick? This is the trickiest math part. Fire up that basic compound interest calculator again and plug in how much you currently have in retirement as your current principal, the amount you’re socking away each year as your annual addition, your years until retirement as your years to grow, and 4 as the interest rate. After you hit calculate, the calculator will spit out a “future value.” What you need to do is keep raising and lowering that interest rate until you find a rate that, when you hit calculate, the future value is close to what you need to have for retirement. For me, that was 9%.

Once you have that percentage, get a hold of the person who manages your retirement and ask for help in choosing a package. Tell them that you did the math on your own and you need to have a specific return in order to retire. Ask them which investment plan is most likely to average that level of return over the long haul.

Some people will note that if you put 15% of your salary away every year, your annual addition will increase each year. That’s absolutely correct – I view that extra money as breathing room so that if the return isn’t quite as strong as you hope, it won’t dash your plans.

That’s it. Just start pumping money into the plan just like that and just forget about it until you need it. This is exactly what I’m doing – I’m putting away my 15% into my retirement plan after picking a Target Retirement one that worked for me and I’m just sitting on it and forgetting it.

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  1. Amanda says:

    The quoted 3% “inflation rate” does not take into account the skyrocketing cost of food and fuel. If it did, the inflation rate would be something like 10%. This is why the Fed stopped publishing the M3 number, which had always had a strong correlation to the real inflation rate. I think you’ll need a whole lot more money per year to live than you’re calculating, unless you don’t want to eat or drive when you retire. :)

  2. Peggy says:

    The only problem I see with this method is that how much you’ll need in retirement has precious little to do with your INCOME. It has to do with your EXPENSES.

    As an example, let’s say you earn $100,000 per year. However, thanks to diligent savings for retirement and general living below your means, you only spend $50,000 per year.

    Using the method in this post, you’ll be trying to replace $75,000 per year, which is half again what you actually need.

  3. blackliquorish says:

    How exactly did you arrive at your estimate of needing 75% of your current salary during your retired years? Is this enough to cover supplemental health insurance, plus hearing aids and dental work and eye health and all those other costs that escalate when you age? Should the calculation include putting in extra now, so that if you have to put in less during the years your children are in college/getting married, it all works out in the end?

  4. guinness416 says:

    The 75% or otherwise is so difficult to get my head around. Once I back mortgage and retirement contributions and some of my travel expenses out of my spending it’s nowhere near that percentage. But then, who knows what health-related expenses we may have, how long my husband may be around, or even what country I may be living in. And I look at my grandma and the amount she spoils her grandkids and her church with and I’m up at 100% again!

  5. blackliquorish says:

    Returning to add…
    I just did that life expectancy calculator and mine is age 102.

  6. ciwood says:

    Remember, planning is a process, not a target. Of course any plan you establish today will be wrong in 40 years but by adjusting your plan annually, you guarantee a correct answer 40 years from now. The important thing is to start your plan and reassess it annually! Also, it would be wise to assume a few bumps during the next 40 years so optimistic planning(saving the minimum) will leave you to vulnerable. I know. I am 58. I have had money. I have been broke(bankruptcy 1988) but now I am back in the black. Maybe three different plans (optimistic, neutral,pessimistic) would be appropriate. The measure your results against all three planns annually and adjust. My biggest problem right now is How do I transfer all I have learned to my spouse and son so that they will not blow their inheritance???

  7. Trent Hamm Trent says:

    The 75% is a rough thumbnail. Basically, the way I came at it is that I subtracted out how much of my salary today I spend on debt repayment and figure I’ll do just fine with the rest. I might have medical costs (a big addition) but no child care costs (a big subtraction).

  8. happy says:

    Wow!! I really wish it was really that easy to determine how much you need for retirement. But there are more variables that have been overlooked or barely looked into. First, like someone mentioned, how much you need depends on each specific case. Do you intend to lead about the same lifestyle as know or maybe you’ll pick up travel. In our case, our hubby and I intend to spend half of the year living outside the US where living expenses are cheaper. I also agree with a previous poster that medical care cost will have a significant impact. Also, will you be mortgage free or not. If you are, that provides for quite a bit of breathing room. That’s why I also start my calculation by going with what my expenses are now and what I expect them to be then, deducting or keeping mortgage payments, medical expenses, etc. Smartmoney.com has a calculator that can help you with this.

    I beg to differ with you in that you WILL need some investment knowledge to get to a plan you are comfortable with. First of all I think it is not as easy as calling you retirement plan manager and tell them “that you did the math on your own and you need to have a specific return in order to retire, then pick a plan and forget about it.” First you are overlooking the individual’s propensity to avoid risk. One can’t just pick an investment based on the level of return, you need to keep in mind RISK. How much risk are you comfortable with. You also have to remember that as you get closer to retirement you will need to shift your portfolio to safer investments in order to maintain your principal safe.

    Also, you can’t just sit and forget about it. We all know investment returns are not guaranteed because past performance is not a guarantee of future performance. So, you will need to check on your plan to make sure it’s doing as you expected.

    Other variables that have been overlooked to determine how much you should be saving are employer-matching and your ability to save outside of your employer sponsored plan. Also, if you really want to complicate it a bit you could bring in tax considerations into your calculations: should I consider investing through a Roth IRA to reduce my future tax bill?

    I think ultimately the best we can do is a rough estimation and hope for the best? I hope not. I have spent a lot of hours putting together my own retirement model to see it’s been for nothing at the end.

  9. Debbie says:

    My method is a little different because I want to retire early and I have a pension plan at work. I started by looking at the earliest date I could possibly retire and get the pension. (Age 52–and my house will be paid off at age 50.) Then I calculated how much I would receive. If I subtract my mortgage and my retirement savings from my current salary, I get a number slightly lower than my pension would be. That number does increase periodically, too, though I doubt it quite keeps up with inflation. And good free health insurance is included. Ta da! I’m all set.

    Unless I leave this employer or they change the pension plan for the worse (again) and don’t grandfather me (again) or the plan goes bust (though it looks great now), etc. It’s too much all my eggs in one basket.

    So a while ago, I calculated the maximimum I thought I could remove from my paycheck without really noticing (about $60) and calculated how much I could put into my 403b (like a 401k) that would lead to my paycheck being reduced by that amount (about $75) and I put that into stocks. I was afraid of stocks, so that’s why I put in an amount that I could lose. Since then I have realized that even when the market drops by 50%, it probably has just doubled a couple of times, so it’s not quite as scary as people make it sound. With a broad index fund, you really aren’t likely to lose everything.

    Next I switched to a Roth IRA because I decided that my tax rate is going nowhere but up. I’m getting close to the top of the 15% bracket, so I’m unlikely to move into a lower tax bracket. And taxes are currently at historic lows, so they’re also going nowhere but up.

    The last time my pension plan got worse, I decided to calculate the minimum I would need to retire at the same age with no pension at all.

    If I retire at 52, it’s quite likely I could live a very long time after that, so I decided to calculate how much I would need to make withdrawals indefinitely. I’ve seen two philosophies on this. 1) Withdraw 7% the first year and increase that amount for inflation each year–this would work if the market went up the same amount each year, but since it doesn’t, that’s risky. 2) Withdraw 4% the first year and increase that amount for inflation. This always works. But yikes, I’ll never save enough.

    So my plan is to withdraw 7% every year, regardless of what the inflation rate is or what the market is doing. Some years that will be a lot, some years not so much. When I get more money than I need, I will buy bonds with it; when I get less, I will sell the bonds to get extra. (I will start off with 10-20% bonds depending on whether I feel the market is high or low.)

    For my expenses, I calculated the same as I have now minus my mortgage payment and retirement contributions. Many people think they will have fewer expenses when they retire because they won’t have any work-related expenses. However, I already don’t have any work-related expenses. For example, I take a free bus to work and my clothes cost the same as the clothes I would wear normally since I buy at thrift stores.

    Lately I’ve been realizing my expenses will actually probably be higher because I’ll have time for more hobbies, inflation will probably be bad when all the boomers retire and they have to raise wages to get anyone to take jobs, and I’ll spend more on health care. Still, I can barely afford to reach the baseline I calculated (I’m 45 already), so I’m telling myself I can take part-time or temp jobs to supplement my income if I want (at age 52 I’ll probably still have my health). Plus, whatever happens I’ll probably get something from my pension eventually and I’ll probably even get something from Social Security eventually, even if not as much as currently being promised, so those additions will make it easier to deal with inflation.

    So now I have three baskets, one of which (my pension) could pay everything, one of which (my IRA/403b) could barely pay for everything, and one of which (Social Security) could probably keep me from living on the street if I didn’t mind having roommates, eating a lot of peanut butter and jelly, and spending my days in an air-conditioned library. I really only need one of those baskets to pan out for me.

    An important fourth basket is health. I have good insurance now and am getting the annual checkups, the 6-month dental cleanings, etc. I watch my weight and blood pressure and take action when necessary. I’m trying to find more hobbies that burn calories.

    An important fifth basket is happiness. You need friends and hobbies, maybe family, maybe religion, that kind of thing. These things can help take up the slack when your finances are a bit whacko.

    And as I mentioned, my house will be paid off. That can be sold or be used for a reverse mortgage if necessary. Meanwhile it means that instead of paying rent, I pay taxes, insurance and repairs.

    The reason you want to calculate all these numbers when you’re so young that you know they’re very unguessable is that you start thinking about what kind of lifestyle you will want later and you get an idea of what’s a good amount to set aside. You’re then likely to save more than people who don’t think about these issues, and so your life will be better than it would have been otherwise, even though things won’t go exactly as you have planned.

  10. Mark McGuire says:

    I am curious where you got the age 62 to start drawing benefits. You are younger than I am by a few years so we are not too far apart.

    The only reason I am asking is because according to the U.S. Social Security website, for you and I to recieve government benefits, we will be 67 years old. (That’s for full benefits, you can get partial benefits but that would mean about 25% less of what you would get with full benefits).

    I too like you may never retire, while I intend to stop working for someone else, to stay forever young is to keep learning and to keep being active, and having grown up in a business mindset, that could mean partly running a pizza joint at the beach.

    I make it a point to retire without drawing social security but not everyone realizes when they draw social security because of the amendment. If you were born after 1960, you have to wait till you are 67 to recieve FULL benes.

    It is very well possible that there may be another amendment coming soon, who knows? Maybe those who were born after 2000 may have to wait till they are 69 to recieve full benefits, and 65 for partial benefits.

    While it is one thing to prepare for retirement, it is another to really know what your government can do for your retirement.

  11. Sammy Sosa says:

    I am curious why you think that age calculator is so far off. You added 17 years. Looking at the questions it asks, it makes sense to me to do things now to hopefully keep your medical expenses as low as possible in the future. 70 seems awfully low for someone your age!

  12. vh says:

    Here’s one more thing to factor into the retirement calculations: middle-class children never grow up.

    Because of the obscene cost of housing in major cities plus the low rates of pay in right-to-work states (even for young people with college degrees), folks nearing retirement are finding themselves having to help out young adult children. My son, whose job pays more than the median wage in our metropolitan area & who has an excellent driving record, says he would not be able to drive his old junker of a car if his dad weren’t paying the insurance. If I weren’t co-investing in a house with him, he would still be living in a truly nasty firetrap.

    You may find yourself wanting (if not having) to help out a little as your children get on their feet in early adulthood.

  13. Minimum Wage says:




    What if your income is minimum wage and you have debt and can’t save one dollar? Does it really matter how much you “need” for retirement if you have no way of getting there?

    And if you spend “only” $15K but that’s all the income you have, wouldn’t you say that INCOME is relevant?

  14. Shevy says:

    I ran the numbers for me and there was both good news and bad news. I could live to be 99, but I won’t have the money I need by a long shot. I’d need to earn just over 40% interest annually! More realistically, this means that I have to put away more, retire later, rely on government money to still be around when I’m over 65, etc. and I still can’t get the numbers to look good. They just get less bad.

    I’m not in the truly dire straits that Minimum Wage is in, but I’m not that much better off and it’s scary. I’d rather not be 90 years old, living in a trailer park, eating mac & cheese 6 days a week.

    This is why I believe I have to come up with some creative ways to change the parameters of the situation, ways I’ve been working on since the first time I ran one of these retirement scenarios. (They’re all a little different, but usually end up with similar results.)

  15. Kenny says:

    boy, there are lots of ideas about how to plan for retirement! The more I think about it, the more I believe I’ll end up working at Papa John’s or Blockbuster Video, not because I have to, but because I’ll run out of things to do in my golden years!

  16. Liz says:

    I liked your comment, Debbie. I have some questions regarding this method of planning for retirement:
    1. It seems odd to expect zero from the government. Even if you don’t want to be fully dependent on social security, I think it is reasonable to expect a little bit.
    2. Why do you multiply the number you want per year times 25? If you had 2 million dollars growing at 5%, you could take 100,000 out per year without touching the principal.
    3. You seem to be working on some passive income streams. It seems likely to me that you would still be getting some income from these, or that you and your wife would find at least one part time job between you.
    4. It confuses me that you are married but you mention only your income. Is this to support both you and your wife? Or are her savings extra? I ask because I frequently see this kind of calculation on personal finance websites, and as a married person I am wondering how to interpret them.
    5. For there to be no social security and no growth on your retirement income, I think we would have to be in dire straits as a country. If you think this is likely, you might want to diversify your holdings a lot, buy gold, and maybe invest overseas. I don’t think there is ever a way to be totally secure.
    All that being said, I have to start thinking about retirement too: )

  17. Kelli says:

    Do you figure 15% of your net salary or gross salary?

  18. janewilk says:

    This is probably a really dumb question, but…
    Are you putting $7500 into your IRA every year? Or is it a 401k?
    My husband and I both have IRAs, but I think the maximum contribution for 2007 is $4000 (each). Now that we finally have our financial ducks in a row we would like to save MORE than $8000/year for retirement, but I don’t think we can put more than that into our IRAs and so therefore would have to put anything over $8000 into another vehicle. Right? Or am I missing something?

  19. Minimum Wage says:

    A $7500 annual contribution is probably into a 401(k) because the full amount wouldn’t all be tax deferred into an IRA. Or it could be split, between the two accounts.

  20. Peter says:

    The percentages necessary for retirement can get much lower depending on many factors. As an idea of where you would be able to cut back: you should no longer need to pay for SS and medicare (7.4%), no longer save for retirement (15%), expenses associated with college for the kids (3-5%), and hopefully no longer paying a mortgage (10-15%). This could drive the number down to 35-40% of take home pay (other options include the possibities of downsizing your house and hence utilities and taxes, no longer paying for life insurance, etc.). As plenty of people mentioned, its down to your goals as well. The more you want to whup it up, the more of a percentage you’ll need.

    With respect to the planning aspects, when I started I was told to put away roughly 10% of income and I’d be golden. Now it seems 15% is the standard recommendation. Point is, you need to start with something. I’ve modified as I’ve put some years behind me, increased my amounts as the salary has grown (e.g. take one or two percent of a four or five percent raise or even a 3% cost of living increase and put it straight to your 401K, you don’t notice the money gone, since you’ve never been living off it). Also as you get closer you can hopefully beef up the amounts (e.g. catch up contributions to retirement accounts for people over 50 are likely to still be available).

    Of course, that would be good news if you could live as well on 60% of your income and see no decrease in your standard of living. But I think to be conservative you should shoot higher. Hence, I’m more comfortable planning for a 75-85% of salary as a goal.

    Finally, Trent’s necessary amount of 2.5 million to generate 100K in income yearly essentially is an estimate not to touch the principle (though he didn’t arrive at that conclusion directly). It isn’t necessary unless you want a big cushion in case you live longer or you insist on leaving it to people who should be capable of funding their own retirements (i.e. your heirs). If you’re willing to touch on the principal, you can probably get away with a signficantly smaller amount.

  21. LC says:

    I find the 75%-85% rule of thumb to be way off in my situation. I currently spend over 50% of my salary on savings, investments, and paying down my mortgage (which will be long paid off by that time). I understand that this isn’t widely true, but many people can live on less than what many experts predict.

    As far as touching the principal, I think that it should be one’s goal to live only off the interest, but in the case of a $2.5M nest egg, I would say it’s ok to dip into that a little.

    Something that some people forget is to account for inflation in the amount of income you need.

  22. Peter says:

    @ LC I think your case is the point I was trying to make. You may need significantly less in retirement than the many of these finacial sites are promoting. While it’s important to save what you can and possibly push for a higher goal, it isn’t necessarly worth it to pauper yourself in the present to get to some of the numbers these financial calculators seem to be pushing (e.g. >80% of income). I know for myself, while I’m reaching for a goal of 75-85% of current income in today’s dollars, I’m really hoping that I won’t need nearly that amount to enjoy my retirement without suffering a cut in my standard of living.

  23. mr 64 says:

    People had better start a retirement savings being that our Goverment and George W. Bush is spending it all in useless wars across the world.

  24. mrs P says:

    I agree the predictions are way off depending on the lifestyle you choose. We enjoy just living! we are not amused by expensive foreign travel or unnecessary must have purchases and we don’t go without.
    We do not waste money on silly presents for each other…I can hear myself saying to my husband If I have to dust it or hang it on a wall I dont want it and I have heard him when talking to his friends who are complaining he is so happy his wife is not a shopping bag ( I guess I’m just a bag..lol) We make major purchases (anything bigger than a chocolate bar & pop) jointly after discussing it that way there are no surprizes which brings to mind a friend of mine one day came over and was royally p*ssed at her spouse when he came home with a $6000.00 tv system and said look what I bought us! us? she proclaimed.

    We figured out our goals early and became debt free as soon as possible then packed away the nest egg 5 years before retirement we purchased our retirement home on a beautiful Canadian river for cash then spent the next 5 years kitting it out no expense spared on comfort we still managed to put away what we would have wasted paying off a mortgage… now both retired we have moved our plans into guaranteed investments they grow steady and top up our indexed company pensions we pull about $30,000 CAD a year and live like kings not counting the interest off our plans.We have not yet started drawing government pensions about 3 more years for that at age 60. Plus part 2 of the plan when we decide we no longer want to maintain the property because we are too old the house gets sold and its off to the 55 plus block and the money goes into the kitty as well. Or you can pull the money out of the house with the reverse mortgage scheme not my choice but the options are out there so dont forget to count your assets as well bricks and mortar only go up in value often much more than any plan. As far as heath expenses for you people in the USA I hope social medicine comes soon its not right that you work hard to make your future and it can be stripped away from you because an unfortunate medical situation arises…oh and it will all old people have health issues eventually.
    Oh and for the record next time your in the grave yard take a walk around and have a paper with two columns and tick off how many graves are older than your calculated age and how many are younger
    I have a nabor who is 87 and in poor health he told me a while ago he has been waiting to die for the last 5 years thats he’s ready to go, so quality of life has something to do with it as well. To sum it up in one sentence It’s not about the money its about the choices. I feel they try to scare the hell out of you about retirement relax and make it happen.

  25. no says:

    sorry, that’s the typical view, and the typical view is rediculous. How in the world can you accurately guess how much money you’ll need? Living costs could go sky high, you could get sued and lose it all, and the stock market could crash and wipe a large portion out.
    The sad fact is, no single dollar amount of money is enough.
    The goal to retirement is much easier if you look to have more passive income coming in than going out. If that decreases, you have already developed the skills neccesary to develop passive income, without having to do much physical work.

  26. Allison says:

    Hello all.. I’m a new nursing grad, just starting my career and browsing the web due to my confusion about my hospital’s retirement options. After reading your posts, I’m scared out of my mind and think I should have minored in FINANCE!! :/ Truly, fresh off the college boat (with student loans!), where to start?!?!?!

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