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How Much Money Do You Need to Retire?

Ever wonder how much money do you need to retire? The number is probably not what you think it is.

By Cato ConroyPublished 5 years ago 8 min read

A while back, I was talking about my retirement plans with a friend of mine.

I have a Roth IRA, along with a small stock portfolio. It's not much, but it's a start. Lately, I've been working on beefing up the ol' retirement fund in hopes of being able to retire at one point or another.

Admittedly, I'm 30 years old, and if you listen to most personal finance experts, I'm barely on the right track when it comes to my retirement fund. It takes a while to do, but hey, it's important for your future.

My friend, who was 38, was in a bind. He didn't have a bank account, let alone a retirement fund. He didn't know what a 401(k) was, and he definitely had no idea what a Roth IRA could be doing for him.

After talking to him for a bit, I realized that I needed to give him a crash course on personal finance. With a little help, he might still be able to pull together enough money to retire by 70 if he works hard at it.

He had a lot of questions that he wanted to ask me. Some were about banking, others about credit scores, and even more about the concept of investing. When it came to retirement, the first thing that he asked me was, "How much money do you need to retire?"

Before we get started, I want to talk about pensions.

Once upon a time, back in the age of Baby Boomers and the Silent Generation, pensions were the norm. After a certain amount of years worked on the job, our older generations could bank on getting paid well into their old age.

These days, pensions are being phased out at a breakneck speed. The chances of us being able to work without setting aside a retirement fund are nearly zero. The only people who really have pensions work are in the government—and that's not necessarily going to stay the case for long.

Simply put, you can't bank on a pension to retire anymore.

To be able to retire, you will need to put money aside in a retirement fund, or otherwise plan for a way to support yourself without working. This will require the use of a 401(k), a Roth IRA, or another similar investment vehicles in most cases.

How should your retirement fund work, anyway?

In order to understand how much money you'll need to retire, you need to understand how retirement funds typically work.

Your retirement fund should be made up of investments that will work for you when you are no longer capable (or interested in) working. The majority of retirement funds are tied to stocks, including Roth IRAs and your company-owned 401(k)s, and that's a great way to plan out your future.

Historically, the stock market offers returns of about seven percent per year on average. Sometimes it's higher, sometimes it's lower. Either way, calculating your returns on average is a smart way to plan out how much money you'll have at the end of your career.

As long as the sum of all those different retirement funds equals your goal amount, you can retire with relative ease.

The most common rule of thumb is that you need around $1 million to retire.

If you were to ask someone in the finance industry how much money they need to retire, they would typically tell you that you need at least a million. This is the age-old retirement advice your parents may have received, and to a point, it's pretty solid advice.

Assuming that you have an estimated five percent annual return on investment, a retirement account of $1.18 million will give you an annual income of $40,000. This would allow you to retire for approximately 30 years without issue—no other income required.

However, $40,000 isn't always enough to make people comfortable in their retirement. Sometimes, $40,000 a year is more than enough. Every single person has their own "magic number" in retirement.

So, how can you figure out the magic number for yourself? The answer isn't that easy.

What about Social Security?

If you factor in Social Security benefits that people receive once they hit 62, the amount of money that you would need to retire might seem way lower. However, if you're a Millennial or a Gen Z kiddo, I strongly suggest you don't bother with this factor at all. All the more reason we should get our kids to care about the stock market, am I right?

I often heard from older folks that I won't have Social Security when I am old enough to retire—and frankly, I believe them. Politicians have gutted that safety net, which means that any chance of me keeping myself afloat when I'm older will boil down to me.

If you're wondering how much money you need to retire, assume that Social Security won't be there to help you. Why? Because there's a pretty good chance it won't be. If nothing else, just sticking to the rule of thumb requiring you to save at least $1 million is a good idea.

If you are going the traditional retirement route, then you should aim for a target that will give you at least 80 percent fo your annual income.

It's commonly understood that retirement means that you will need to scale back your lifestyle a little bit. It's also understood that you probably will have a somewhat similar cost of living in most cases.

So, most experts will suggest targeting an annual income that's around 80 percent of what you currently earn. On a more conservative side, sticking to 100 percent of your current lifestyle costs is a better option—if you can handle working towards that goal.

Let's take a closer look at what this means. If you make $50,000 a year now, that means that you should aim to make at least $40,000 during your retirement. If you make $70,000, then you should make $56,000 during retirement.

Once you figure out how much your annual target income is after you retire, you can work backwards to determine the magic number. Needless to say, it's hard to answer the question of "How much money do you need to retire?" in a one-size-fits-all answer.

Of course, there are alternative ways to plan for your retirement, too.

There's more than one way to skin a cat, as the saying goes. You don't have to rely on stocks to retire if you don't want to. After all, it's your retirement and you get to choose how your money works for you.

Alternative investments to the stock market each have their own nuances, and each method may change the amount of money you need to retire. In any case, they are something to look into in case the market has left a bad taste in your mouth, or you don't feel you have enough time to do the research necessary to make the stock market work for you.

One way to potentially retire with millions is to start a business and sell it to a wealthy investor when the time is right.

Are you entrepreneurial? Did you create a startup or turnkey investment business that actually works well? If so, you might not really need any money in a retirement fund to make your retirement happen.

Quite a few entrepreneurs who were highly successful at creating startups retired after they sold their businesses for a couple million dollars. Of course, the issue with this retirement planning route is that it's extremely risky. Almost all businesses fail within the first 10 years, so if you choose to do this, try to create a buffer for yourself should you fail.

Many people find that getting passive income creates more than enough income to retire on.

Passive income is what I like to call "the set and forget" type of income. It's income that keeps earning money for you, even after you stop working. Stocks with dividends are a traditional form of passive income, but that doesn't mean that you can't expand into less traditional ways of funding your retirement.

For example, owning a partial share of an apartment building is a great way to get monthly passive income from renters. Others find that they can get a good amount of passive income from books they wrote, media they made, or songs they wrote.

Generally speaking, the more assets you obtain, the easier it will be to skate along when you're retired. This is especially true when it comes to assets that generate hundreds or thousands of dollars in rent per year.

Landlording is a great example of this. If you are a landlord, then you probably won't need $1 million to retire. You will probably need far less!

Before you settle on a magic number of your own, make sure you take inflation and healthcare costs into account.

I'm going to be honest. It's not going to be easy to retire, regardless of your income level. Healthcare costs are skyrocketing and Big Pharma has us in a chokehold. The cost of rent is growing higher than ever before. Inflation is around three percent per year.

If you have kids or intend to have them, you also will probably be asked to support them well into adulthood because of how competitive the world has become. You will need to take this into account when you're planning for retirement.

People who want to retire safely will probably need to save up more than the standard million dollars they need for a 30-year retirement fund. The cost of living continues to climb as years pass.

Besides, people are now living way longer than the standard 30 years after their retirement day. If you want a long, comfy life, you're probably going to need to pad that savings account.

My personal rule of thumb is: Save as much as you feel you need, plus whatever else you can afford.

You can never be too careful when you're trying to come up with a retirement plan for yourself. You know yourself and your lifestyle better than anybody else, which means you are, ultimately, your best savings asset.

How much money do you need to retire? I honestly don't know. It may be something to discuss with a finance professional, and then the question becomes what to look for in a financial advisor. Whatever they suggest though, I definitely suggest trying to exceed that.

personal finance

About the Creator

Cato Conroy

Cato Conroy is a Manhattan-based writer who yearns for a better world. He loves to write about politics, news reports, and interesting innovations that will impact the way we live.

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