What a lovely question, and also, a difficult one. As the resident genius of Midwest Money Mentor (and its only writer/employee, so pretty light on competition for the title) I am happy to jump into this question with you.

What you are likely asking is, “How much money do I need to have invested and saved in order to produce the amount of income needed to:

1. Cover my basic expenses in retirement,
2. Cover some discretionary expenses in retirement,
3. And hopefully also cover me actually traveling or doing other activities that will improve my quality of life (beyond going to the local senior center for bunco, for instance). “

The nice thing is that even though the answer is difficult for me to provide (that will fit your specific situation), it is not exactly difficult for you to figure out.

For me to give a perfect generic answer that will fit everyone, is pretty much impossible. But for you, here are a couple ways that most financial minds will generate an answer to help you with your planning.

For a quick note, these examples are largely focused on people retiring around standard retirement ages (65 to 67 years old). If you are retiring earlier, some further number crunching would be recommended above these standard rules-of-thumbs because you would likely not be using Social Security to offset some of your planning, at first.

1. A FOCUS ON INCOME –

One of the quickest ways to plan out how much you need in retirement is by focusing on your current income. If you wish to live the exact same lifestyle that you live now, it would make initial sense that you should have enough investment assets to produce the same amount of income in retirement (and coordinate that income with social security and any possible pension you could have).

A typical breakdown with this focus is to save up ten years of your current income by the time you retire, in order to have enough to sustain your retirement.

Now, you might think “10 years of my income? But I will hopefully be retired much longer than that! Yes, you hopefully will be, but why don’t we do some math to make sure you understand why that number is being used.

First, let’s say your current household income (combined), equals $100,000 a year. 10x that income would, clearly, equal $1,000,000 (hopefully you could figure that out before I even typed it down). With a normal W2 wage, you would have deductions coming out for health insurance and other insurances, federal income taxes, Medicare and Social Security taxes (FICA).

For simple math, let’s say you take home around 78% of your gross income, minus all those expenses, so in this instance $78,000 a year ($6500 a month).

If you had $1,000,000 in investments, and you used a fairly standard withdrawal rate percentage of 4% to 6% a year (we will use 5% in this example), that would produce $50,000 that year for your income (5%) from that $1,000,000.

On top of that, you would be receiving Social Security. I plugged in a Social Security calculator to help us out here. I used the household income of $100,000, and lower in prior years, and used an example of taking the benefit at age 67. According to the https://www.ssa.gov/cgi-bin/benefit6.cgi calculator, that would mean the household would receive around $2550 a month in social security benefits today (based on both parties taking at age 67, if the household included two adults).

$2,550 a month equals $30,600 a year. And $50,000 plus $30,600 equals $80,600 of yearly income. So, in this example you would be producing slightly higher income than the take home pay example used (if that was close to yours). But, you still need to factor in some taxes (Potentially. Some of your social security may or may not be non-taxable depending on your circumstances, and if your $50k of income from investments was taxable capital gains, your tax rate would be 0% in this example) and healthcare costs that you elect through Medicare.

Either way, a very large percentage of your income would be covered moving forward, and so, the math fits.

2. A FOCUS ON EXPENSES –

Another philosophy looks at expenses instead of income. Perhaps, you were making plenty of income beyond what you needed, expense wise, while working. This would have helped you invest that income to produce your retirement assets.

In that instance, instead of looking at continuing off an income that you would not be needing in retirement, we can focus on the expenses you will be spending, instead. In this conversation, let’s say your expenses (including mortgage, discretionary, and everything) adds up to $60,000 a year ($5,000 a month), and those expenses would continue into retirement.

In this conversation, you would usually see a multiplier of your annual expenses be the calculation used to figure out your assets needed.

We can do a reverse of the conversation above. Let’s say your social security benefit was still going to be $2550 a month ($30,600 a year). You would then need to cover $29,400 a year ($2450 a month) to cover the remaining amount to have $60,000 ($5000 a month) of income. If you used the same withdrawal rate percentage discussed before (5%), you would need to multiply the remaining expenses that need covered ($29,400) by 20, which would equal $588,000 (the answer to the question of how much you would need, in this example).

Why would I multiply the amount needed each year by 20? Because, 100% divided by the 5% withdrawal rate equals . . . ? 20! So then, flip that, a 5% withdrawal rate multiplied by 20 equals 100% (of your assets needed). Or in other decimal set ups, 1.00 divided by 20 equals .05. And .05 multiplied by 20 equals 1.00.

Looking at it dollar wise, $29,400 times 20 equals the $588,000, the number you need to know, in this example. And $588,000 times .05 (another way to say 5%) equals $29,400, the remaining amount you want to cover in the first year of your retirement (in this example).

In conclusion, two simplified directions to help you calculate the amount of money you need in investments to retire could be 10x your annual income, or 20x your annual expenses (if you used 5% withdrawal rates).

Again, if you are retiring earlier than the 67 years old example above, and would not have social security to the same extent or for a good while, more calculations are likely to be recommended. Maybe you need to plan on a 4% withdrawal rate instead of 5% (which would mean you multiply your expenses by 25 instead of 20). You have to do the extra math to keep yourself looking good. But, start with the above, and adjust based on your specific situation.

Sound good?

And for something not related to this post at all, here is the Young Photography photo that won the Nature InFocus Photography award (2024).