How Much Do I Need to Save for Retirement?  Probably Much, Much Less Than You Think!

how much do i need to save for retirementWhen it comes to your retirement savings, how do you know when enough is enough?

According to an article from CNBC, a global investment management firm surveyed investors and you know what they came up with?

An average retirement nest egg of $2.5 million! That’s how much they believe it will take to have the same quality of life they’re enjoying today.

As I found out first hand at a lunch outing with a friend, this sort of belief is all too common!

But what if it’s not at all true?  What if you really sat down and actually figured out how much do I need to save for retirement and concluded …

… it could be much, much less!

Perhaps you’re already a lot closer than you think!

Here’s my lunch story …


You Think You Need How Much To Retire?

how much do I need to retireI was out to lunch with a co-worker when we started talking about all the little things we do to save some money on our household expenses.

The conversation took a turn to our company’s 401(k) plan and how much we were each saving there.  That’s when she made the comment:

“My husband and I probably won’t have enough to retire until we’re at least 70!” 

(She’s only 45.)

That really confused me and caught my attention …

She had already told me she has DOUBLE what I have in my 401(k) account.  Why did she think she’d have to save another 25 years?

So I asked her … why do you think that?

She replied it was because they were a long ways away from having a few million dollars in their bank accounts.

A few million?

I asked her why they believe they needed a few million and that’s where I discovered the disconnect …

She didn’t know.

“Don’t you need a few million dollars to retire?” she asked.

I asked her if she and her husband had ever really sat down and figured out what their needs truly are and she said “no”.

A few million was just what they both assumed they would need …


How to Figure Out How Much Money You Really Need for Retirement:

retirement savingsSaving for retirement is often a struggle for a lot of people.

In the case of my friend, that part was no problem!  As I mentioned, her 401(k) savings were already double of mine.

But she had neglected the other half of the equation …  A very important part!

How much do they really need to save for retirement?

According to my calculations, their target was way, way too much.

How to Calculate This Yourself:

There are a million ways to figure out what your retirement nest egg goal should be.

But this one is by far the simplest one:

  1. Take your average monthly expenses.
  2. Multiply them by 12.
  3. Then multiply them again by 25.

Example: If my monthly expenses are approximately $5,000, then my retirement nest egg size should be:

$5,000 x 12 x 25 = $1,500,000

That’s it.  Not too complicated, is it?

Now here’s a little bit of the logic behind what you just did.

Monthly expenses.  It’s better to base your retirement needs off your expenses rather than your current income because your expenses can be a much more accurate basis.

If you’re happy with your quality of life now, then chances are you’ll probably have the same level of expenses during retirement.  If you want them to be higher or lower, simply adjust.

Multiply by 12.  This one is probably obvious – multiplying by 12 takes us from monthly expenses to yearly expenses.

Multiply by 25.  The reason you multiply it again by 25 is because of something called the safe withdraw rate.  A safe withdrawal rate is a commonly used figure in retirement planning that says you can pull out a certain amount of money “safely” each year for retirement with very extremely high confidence you won’t run out of savings.

According to the Trinity Study, the classically accepted rate is 4%.

The reciprocal of 4% equals 1/0.04 = 25.

Hence it’s a lot easier to tell people to multiply by 25 than to tell them to divide by 0.04.


Shaving 15 Years Off of Working:

enjoying retirementSo back to my friend at lunch …

The next day I asked her how much her and her husband thought they’d really need to have a “happy” retirement.

Based on the numbers she gave me, we quickly did some calculations in Excel and discovered they could actually afford to retire very comfortably by age 55 if they really wanted to!

She was floored!

By actually taking the time to figure this out, we had essentially erased 15 years of working and possible unnecessary retirement savings.  That’s 15 extra years to do whatever they want!

That’s pretty incredible!


A Little Bit of Planning Goes a Long Ways:

As you can see, taking the time to sit down and put a plan on paper pales in comparison to the 5, 10, or even 15 years of NOT having to work that you might save!

So why don’t more people take the time to do this?  This quick video series from Prudential shows some very interesting experiments as to why people put off retirement planning.  Take a look:


Refining Your Retirement Plan:

Please remember that the equation above is simply the most basic of basic methods to approximate your target savings.

Once you’ve got the general idea, if you’d really like to see how much you need to save for retirement, use a tool like FIRECalc to get a more statistical analysis of how your goals will stack up.

Again, I can’t say it enough.  It’s worth your time and planning!  Just like my friend you might find out that you need a whole less than you thought and end up saving yourself many years of working that you don’t need to put yourself through.

 Readers – How much do you believe you need to save for retirement to be happy?  Are you basing it on the things we talked about here or something else?


Images courtesy of Frankeleon | Flickr, Pixabay, and MorgueFile.  


  1. says

    If the average retirement nest egg is $2.5 million, I think I am so much left behind and gotta find ways to get more income through passive income and investment. MMD, I am impressed by the way with the results when I used the formula. It showed the truth that I gotta do something for my retirement.
    Jayson @ Monster Piggy Bank recently posted..How to budget for a luxury carMy Profile

    • says

      Just to clarify, $2.5 million represents what most people THINK they need in order to retire. Unfortunately the actual average nest egg balance for most Americans is much, much, much less. According to Fidelity it’s only $261,400 for people who have both a 401k and IRA.

      I’m glad to hear you gained some value out of that retirement formula. I really encourage you to try FIRECalc to get a more advanced feel for how your money and plan would work out.

  2. says

    After spending the first two years in early retirement, you really DON’T need as much as you think, and I didn’t even have Social Security.

    Part of the reason simply is that you don’t have to save for retirement anymore because you’re retired! I was saving 50%+ of my income, so that means I can make 50% less.

    Lots of cheaper stuff or freebies in retirement!

    Financial Samurai recently posted..Can Financial Samurai Be The Next Billion Dollar Financial Technology Company?My Profile

    • says

      That’s very encouraging to hear from someone who has actually achieved retirement at such a young age. I completely agree that living off of less during your working years only helps to keep your actual lifestyle needs and overhead way down for when you actually do accomplish financial freedom someday.

  3. says

    With a home paid off and children grown and no longer needing to pay payroll taxes and save for retirement as Sam mentioned, most people can retire on much less than the % of income measurements that are often given out by advisers and the media as a whole. I’m certainly with you on calculating based on expenses vs. income. Our number for retirement is a bit short of the $1 million mark.
    John C @ Action Economics recently posted..Retirement Planning In Your 20sMy Profile

    • says

      Well done having a plan that requires less than $1 million. Do you have other sources of income that will help subsidize your nest egg withdrawals?

  4. says

    I really think we could be comfortable on $3000 a month after our mortgage is paid off, but it’s the unknowns that really make me wonder. Will we want or need to help our daughter more than planned? Will we have a big health expense? Our rental income should more than cover our needs, but I still want to have a good amount from other sources just in case.
    Kim recently posted..Father’s Day Gifts For Every BudgetMy Profile

    • says

      We’re erring on the side of caution as well. Even though all my financial freedom plans and models call for our basic, target amount, in reality our savings should far exceed it and give us a lot more confidence that we’ll never run out of money.

  5. says

    +1 for the unknowns.

    In theory, were could retire once the kids leave home, for college or elsewhere.

    However, that’s assuming many things – our long-term investment ROI, how long we live, and the biggie, our health insurance costs. Once the kids and the mortgage are gone, that reduces the overhead substantially, but the unknowns are always there.

    Time to look into a long term care plan, I think.
    Jack recently posted..Get Paid For Your Opinion In A Focus GroupMy Profile

    • says

      Medical costs have got to one of our biggest unknowns as well. Right now we have some nominal amount in place to cover this expense as part of our plan. But who knows in 10 years if that will actually be the true cost or not? At the rate medical coverage keeps increasing, chances are it might not. However, that doesn’t stop me from planning.

      • Suzie says

        MMD, thanks for bring up a VERY important point. Medical expenses are going to be a HUGE unknown and should be taken into consideration when planning for retirement. Just my opinion based on personal experience with aging parents (mine and my husband’s).

        • says

          It’s really scary to think about; especially since there seems to be no end in sight with how high medical expenses keep on climbing. I really do not even want to think about what they will be when my wife and I are retired in 10 years. There’s a small part of me that fears those expenses alone could blow my whole retirement budget model right out of the water.

  6. says

    The more I play with FIRECalc, the more I think I need to cut my monthly expenses way back. I always try not to include my mortgage in the calculation but in reality, that mortgage isn’t going anywhere for a while, so that means I have to come at it from a different angle. More money? Fewer general expenses? Something has to give.

    I do like to fantasize that the Bill Gates fairy will pay my house off some day and I can survive on a nice $3,000/month with my wife. It seems like $1,000,000 would hold up for quite some time at that burn rate.

    Can’t hurt to dream, right?
    FI Monkey recently posted..Younger Me – Keeping up with the Joneses Is for SuckersMy Profile

    • says

      I know all about dreaming. I’m also still waiting on the day that someone makes me a real offer to buy this website or any of the other ones I own for a cool five or six figure amount. It would be “goodbye mortgage” for sure then!

      Out of curiosity, when you’re playing with FIRECalc, what kind of % success rate are you looking for? I seem to be good with 95% or higher. I’ve got a very interesting post coming up next month where I collected a ton of data from trying out different variables on FIRECalc to help with retirement planning.

      • says

        I am also good with 95% or higher, but truth be told, I am approaching all of this from a green perspective (I’m a newbie). But just giving it a cursory look, a 5% failure rate seems just fine. Especially given the fact that I’m working on building my side businesses up from $0.01/day on up.

        We have to start somewhere, right?

        I’m confident I can use my skills to generate cash flow while I also target the kind of numbers FIRECalc is promising. That should level the risk a little bit at least, even if it just means making up for the difference.
        FI Monkey recently posted..Wealthometer – How This Monkey Measures UpMy Profile

        • says

          I fully agree! Even when we are all retired, there is no reason we can’t still use our skills to bring in some extra cash to pad our finances and make financial independence even more sweet!

  7. says

    Definitely important to take into account the time value of money and the impact of inflation on the value of a dollar over time. It’s true that many can have a secure retirement on much less than they think. Everyone’s “retirement number” is different as everyone’s idea of their ideal retirement is different. Figure out what works best for you and set up a financial plan to get there.
    Dane Hinson recently posted..Why Investing is NOT Like GamblingMy Profile

    • says

      For sure! All my models are always inflation adjusted for that very reason. I’d hate to get all the way to retirement only to find out my target income can now only buy half the stuff I thought it would.

  8. says

    It all really depends on whether or not you pay off your mortgage before you retire. Once you do that, you likely need a lot less money to live off of.

    You also likely won’t have expensive kiddies living at home, needing all your money :)
    jefferson recently posted..The Freedom of Letting GoMy Profile

    • says

      Let me tell you something about those kiddies: They are getting bigger and way, way more expensive! The other day my daughter ate more food at dinner than I did! I can easily see how people who have grown-up children moved out of the house suddenly find themselves with enough money to travel, eat out every night, and have more fun.

  9. says

    I’ve calculated that I’ll become financially independent in 11 years. I currently spend about $36k a year so in 11 years that will be about $50k if inflation is around 3%. Using the 4% rule I’ll need almost $1.3m. I don’t think my expenses will go up in retirement. Most things will go down (eating out, dress clothes, etc.), and that might be partially offset by increased healthcare costs.
    Fervent Finance recently posted..The MIA to LGA DebacleMy Profile

    • says

      Well done on figuring all that out and crafting together a plan! If at all possible, I’d error on the side of over-shooting your retirement savings rather than assuming anything about your expenses just as a precaution.

  10. says

    I used to be very conservative with my retirement calculations, but I’m starting to think that when (if) I hit financial independence, I’ll just keep doing some smaller things that still earn some income. I think that’s important to consider if you’re only working at a job for the money, until you ‘retire’. There will come a point when you have so much financial flexibility that you can shift into doing whatever work you’re most interested in, for much less time during the week if you choose – even if you don’t technically have enough to retire! There aren’t too many early retirees I’ve seen yet that just completely stop doing anything to earn an income!
    Jason @ Islands of Investing recently posted..How do you score on the ‘Investing Serenity Scale’?My Profile

    • says

      Jason, that’s a very good point. I have a similar plan where I still intend to work and earn money doing things I’m passionate about even after I’ve retired. Though my plan calls out to have enough money that I never need to work again, technically there’s no reason you couldn’t get – say -80% of the way there and then make the switch to a new career or job that is going to bring up the difference. The important thing for most people to realize is that by simply doing something about it and sticking to a plan for several years, you’ve given your future-self the power of “choice”.

  11. says

    Thats great you gave your friend 15 years of her life back, hopefully she takes the advice. I know a few coworkers who will never retire. Anyhow its great to do a basic calculation based off retirement, it helps keep people informed. I wonder how many years MMD has left? That’s a good blog post.
    EL@MoneyWatch101 recently posted..The Minimum Wage DebateMy Profile

    • says

      Basic calculations are wonderful to get what I would call a “baseline” idea as to when you could potentially retire. Afterwards I like to get more in-depth using something like FIREcalc to see what chances my portfolio really would have.

      MMD and Mrs MMD only have 10 years left to go! After that its financial freedom.

  12. says

    The thing I dislike about the 4% rule and going by a set portfolio value is that it assumes that you will be getting the value of your assets up to a certain number and then selling them off from there. I prefer focusing on cash flow and income over a fixed dollar amount.

    Since I plan to live on my dividend income down the road, I focus less on portfolio value and more on monthly dividend income. I don’t want sell ANYTHING; I want assets that generate income for life.

    That said, I still have to calculate my expenses (no matter your retirement strategy, you don’t get to skip this part). Living in such an expensive city, my living expenses are quite high.

    ARB–Angry Retail Banker

    • says

      Good call on the dividend strategy. I’ve had that same idea too that if you’re living off of only dividends then it doesn’t matter what your investment portfolio looks like. But keep in mind two pitfalls 1) that would be low diversification and 2) you’d need a really high principal amount of stocks to get a dividend income of $5,000 per month (or whatever number you’re targeting). While I like dividends too, don’t underestimate how capital gains from other stocks or bonds can play a role in hedging your portfolio.

  13. says

    The biggest expense for most is their house/property taxes. If you can pay off your house by the time you retire, you can retire on a lot less than you think. Of course, you will still have to pay property taxes, so be sure to take these into account when you move, if that house is where you want to stay.
    Jon @ Penny Thots recently posted..When You Can’t Afford Organic FoodsMy Profile

  14. says

    Most retirement calculators assume you need something like 80-90% of your current income in retirement, which I think is insane. Hopefully you don’t have a mortgage and child-related bills at that time! Our number is a lot lower, but we also have rental properties to use for passive income. That was part of our early retirement strategy. We’ll see how things go.
    Holly@ClubThrifty recently posted..Why My Emergency Fund is the BombdiggityMy Profile

    • says

      Smart move with the rental properties. I bet those will definitely help out. In a few years once the mortgages are completely paid off they will be mostly straight profit I’m sure.

  15. says

    The biggest expense for most is their house/property taxes. If you can pay off your house by the time you retire, you can retire on a lot less than you think.

    • says

      I think for most people this will be true. Not having a $1000 or more expense to worry about every month will really help reduce how much income you need to be financially happy every month.

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