Before you can answer the question of how much you need, it’s important to understand your retirement needs first. It’s a little more than just adding up how much you expect to spend each month. You need to think about your lifestyle goals, where you live, your health and what kind of activities you want to pursue. Do you plan on traveling frequently? Or maybe you’d prefer a quieter life with hobbies and family time. Each of these factors will play a role in how much money you’ll need.

So let’s get an estimate of expenses as an excellent place to start. Here, housing, utilities, groceries, insurance, health care and most everything you regularly spend your hard-earned money on all belong on a list. After you make a pretty good estimate based upon the present situation, it becomes relevant to discuss how these expenditures would change during retirement.

The 80% rule

Many financial experts advise you to replace about 70%-80% of your pre-retirement income when you retire. Such is the assumption that after retirement, your living expenses would go down since you wouldn’t have to spend money on transportation or clothes for work, let alone put something aside for retirement. Nevertheless, you may still need around 80% of your working income to maintain precisely the same standard of living, especially if you have travel plans, hobbies or higher health care costs.

For instance, if you are earning $75,000 per year before retirement, you might aim for an income of around $60,000 annually in retirement to cover living expenses. That’s your target number to consider when calculating how much you’ll need in retirement savings.

Health care: Don’t forget about it

One of the most significant expenses that retirees often overlook is health care. Medicare is a great benefit, but it doesn’t cover everything — such as long-term care, vision, dental and hearing. On top of that, you’ll still be responsible for premiums, deductibles and copays.

It’s a good idea to budget for these extra health care costs. According to a 2021 study by Fidelity, the average couple retiring at age 65 can expect to spend around $300,000 in health care costs throughout retirement. And that’s just for health-related expenses; it doesn’t include long-term care or unforeseen medical conditions that might arise.

Make sure you’re factoring these costs into your retirement savings goals. Consider setting aside a portion of your savings specifically for health care or investing in a Health Savings Account, if you’re eligible. This can provide a cushion for health care expenses so you won’t have to dip into other parts of your savings when unexpected health needs arise.

The retirement savings formula

So, how much do you need to save? A general rule of thumb is to aim for 10-12 times your final working salary by the time you retire. If you’re making $75,000 a year, that would mean you’d want to have around $750,000 to $900,000 saved up. But this is just a rough estimate. The important thing is to consider your situation, including:

• How long you can work before retiring: The longer you work, the more you can save and the fewer years you’ll have to rely on your savings.
• Your retirement age: The earlier you retire, the longer you’ll need your savings to last.
• Your income needs: If you are accustomed to a certain lifestyle, you will most likely have to save more to maintain it.
• Inflation: Your savings have to keep pace with inflation over time to maintain their value. Make sure to invest in ways that grow your wealth, not just preserve it.

For example, if you plan to retire at age 60 and live until 90, that’s 30 years of retirement savings you’ll need to account for. The earlier you retire, the bigger your savings target will need to be.

Income in retirement: The 4% rule

The 4% rule is a popular guideline for retirement withdrawals. The idea is that you can safely withdraw 4% of your total retirement savings per year without running out of money. For example, if you have $800,000 saved, you can withdraw $32,000 per year (4% of $800,000) for living expenses.

While the 4% rule is a good starting point, it’s not one-size-fits-all. If you retire early, you may have to adjust your withdrawal rate so that your savings last longer. On the other hand, if you are in good health and foresee a long retirement, you may want to lower your withdrawal rate to stretch your savings further.

One thing to remember is that the 4% rule is based on market performance and inflation rates, which can change over time. So, it’s always a good idea to revisit your withdrawal strategy from time to time and make adjustments as necessary.

Other income sources: Don’t forget about Social Security

Social Security is a vital part of your retirement puzzle, but it is unlikely to pay enough to support all of your living expenses. As of recent figures, the average monthly Social Security benefit in 2023 is about $1,800, which equals $21,600 per year.

When you are calculating just how much you need to save, don’t forget to factor in how Social Security will fit into your overall income. While it won’t replace all your income, it provides a steady and reliable source of cash flow in retirement. You can use your Social Security benefit to cover part of your living expenses and reserve your retirement funds for discretionary spending or other unexpected costs.

Setting realistic savings goals

Once you understand how much you’ll need, break down your savings goal into manageable chunks. The earlier you start saving, the more you’ll benefit from compound interest. If you’re in your 50s or 60s, consider maximizing your contributions to tax-advantaged retirement accounts like IRAs or 401(k)s.

It’s also wise to work with a financial advisor to ensure you’re saving the right amount, investing appropriately and adjusting your strategy as your retirement date approaches.

The bottom line

At the end of the day, what you need to have in retirement is determined by your lifestyle goals, health and income needs. The 80% rule and the 4% rule are guidelines, but you should adapt them to fit your situation. Estimate your future expenses, factoring in health care and inflation, and use savings strategies that will help maximize your wealth over time.

Retirement is a big milestone, and the more prepared you are, the more you’ll be able to enjoy the fruits of your labor. So, take a step back, do the math and make sure your retirement plan matches the life you envision. The sooner you start, the sooner you’ll reach that retirement finish line with confidence.

Lyle Boss, The REAL BOSS Financial, endorsed by Glenn Beck as the premier retirement advisor for Utah and the Mountain West states. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.