How Much Money Do You Really Need in Retirement?

The "Rule of 25" is a good starting point to find your number.

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By Pamela Yellen

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Have you taken the time to run the numbers and determine exactly how much money you need to save for retirement? Have you looked at how much you have saved so far and calculated how many years that money will last? If you've gotten serious in your retirement planning, you may have spent some restless nights calculating and recalculating just how much money you'll need during your elder years and comparing it to what you have saved.

On average, the top 10 percent of wage earners have saved about two years worth of income, according to a study of federal data by the Schwartz Center for Economic Policy Analysis. "Among workers in the top 10 percent of the income distribution (above $115,000 a year), the median amount saved is $200,000," the analysis found. But that's only a start compared to what most people need.

I've previously discussed how most people underestimate both how long they will live and how much they need to have saved for retirement. Those two factors are closely related, since the longer you live, the more money you will need. According to the Social Security Administration:

  • A 65-year-old man today can expect to live until he's 84.3 on average, and a 65-year-old woman can expect to live until 86.7 on average.
  • One out of four 65-year-olds today will live past 90.
  • One out of 10 will live past 95.

Related: How to Work Toward Retirement From Your Small Business

This means that to be safe, you need to plan on your money lasting you until at least age 95 or 100, just in case you're one of the lucky ones who makes it to that age. If you're well-educated or affluent, statistics show that you'll live even longer than the averages.

How Can You Determine How Much You'll Really Need?

One guideline that is often cited is the "Rule of 25," which says you should multiply your total annual expenses by 25 to determine how much you'll need to have saved by the time you retire. So if you plan to spend $50,000 per year in retirement, you'll need to save $1.25 million. To have $100,000 per year to spend, you'll need $2.5 million, and if you want to live on $150,000 a year, you'll need $3.75 million saved. If your number is $250,000 a year, you need to save $6.25 million. And so on.

The Rule of 25 is a good starting point, but it is not an ironclad, one-size-fits-all solution for everyone. You'll need to factor in the impacts of inflation and healthcare costs, among other expenses, all of which suggest you should err on the side of saving more rather than less, for as long as you can.

Related: Retired? Here Are 17 No-Cost Ways to Make Money on the Side

The Shocking Reality of Savings Shortfalls

According to a new study by the Stanford Center on Longevity, people need to save between 10 and 17 percent of their income if they plan to retire at 65, even if they start at age 25. However, the vast majority are putting away only 6 to 8 percent, about half of what they should be saving.

According to the report: "The most prominent downward trends ... emerged in the domain of financial security. This is not surprising given that we are witnessing unprecedented shifts in life expectancy, and at the same time, experiencing a period of unprecedented economic uncertainty. In concert, these shifts put generations of Americans at enormous risk for lifetimes of financial insecurity."

What percent of your household income are you saving? How many years worth of your annual expenses have you saved? The answers to these questions will determine whether or not you have the freedom to enjoy retirement on your terms.

Pamela Yellen

Financial security expert

Pamela Yellen is a financial security expert, a two-time NY Times best-selling author and President of Bank On Yourself. Pamela's latest book is "Rescue Your Retirement: Five Wealth-Killing Traps of 401(k)s, IRAs and Roth Plans – and How to Avoid Them."

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