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How Much Money Do You Really Need When You Retire?

I am a financial professional, and I love to share the simple truths about finance that can change people's lives when applied.

Do you have a savings plan that will be able to support you through your retirement?

Do you have a savings plan that will be able to support you through your retirement?

Failing to Plan Is Planning to Fail, So What's Your Plan?

Most people dream of having a cushy retirement that allows them to spend their time going on cruises and taking their grandchildren to Disneyland, but unfortunately, there are many people that haven't put in the effort required to make that dream a reality.

Most people think that as long as they have a 401K at the company they work at, they should have all the money they need when they retire.

Unfortunately, in most cases, a 401K alone is not enough to support an individual or a couple, and definitely not enough to take the grandkids to Disneyland over and over again.

If you want to have the type of retirement that most people dream of, it is absolutely essential that you come up with a realistic plan, and the more time you can get on your side, the better.

Albert Einstein said, "Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn't, pays it."

A simple understanding of how interest works can literally work wonders on how your retirement plan works and how quickly your money grows.

Along with understanding interest, there are a few other important variables to consider in order to make sure that you are on track with your retirement fund.

The Three Variables That Will Make or Break Your Retirement

There are three main variables that are crucial for you to understand when it comes to figuring out how much money you actually need for your retirement.

Two of these variables are very specific to you, and the other one will affect everyone equally. It is absolutely crucial that you take some time to consider these three variables that will greatly affect your need for money in the future.

Once you have a firm grasp on how these three variables affect the amount of money needed for your retirement fund, you will be well on your way to setting up a plan to get where you want to go.

  1. What quality of life do you want to experience in retirement?
  2. How much money can you spend out of your retirement fund without running out?
  3. How much of an effect will inflation have on your buying power?
Do you want to spend your retirement cruising around the world and visiting scenic beaches?

Do you want to spend your retirement cruising around the world and visiting scenic beaches?

Tip #1: Decide What Quality of Life You Want to Enjoy During Your Retirement

If you've never thought about this before, it's time to start thinking about it. If you don't have a specific destination in mind, it's likely that you will end up somewhere that you don't want to be.

Try to come up with a very specific idea of what your ideal quality of life in retirement looks like, and don't be too afraid of dreaming big. There's no way you are going to achieve a big dream if you don't plan for it in advance, so the sooner you can get a concrete plan in order, the better.

Are you having a hard time narrowing down what quality of life you hope to have when you retire? Here are a few questions that can help you get your picture of retirement a little bit more focused:

  • Are you satisfied with your current quality of life?
  • Do you expect your quality of life to be the same in retirement as it is now?
  • Would you like your quality of life to be better than it is now?
  • Would you be satisfied if your quality of life was worse than it is now?
  • Do you want to go on vacations when you retire?
  • Do you have plans to help out family members financially?
  • Do you dream of being able to donate money to charities and other causes that you support?

Hopefully, you have a better idea of what type of lifestyle you are expecting in requirement now that you've taken some time to ponder these questions.

If you really desire a certain style of living in retirement, it's important that you don't lose sight of that goal.

It would probably be wise to write that goal down somewhere so that you don't forget what your desired destination is.

This doesn't have to be a boring task. Make it more fun by writing down in detail several of the adventures and experiences you would like to have once you retire and don't have to worry about spending time working anymore.

Make a list of vacations you would like to go on and write down who you want to be able to donate money to.

When it comes to saving money, it's easy to accidentally spend money today that you actually were hoping to save for tomorrow.

Having a concrete reminder of your financial goals for the future is a great tool to help you stay on track when it comes to accumulating a sufficient retirement fund.

When you are tempted to spend money that would be better off saved, go back to what you've written down, and it will help you to remember that saving for the future is worth a little bit of sacrifice now.

Tip #2: Determine How Much Money You Can Spend Without Running Out

There's been a long-standing rule in the financial industry called the 4% rule that helps to determine how much money you can spend without running out of money before you die.

This rule states that if you take out 4% of your investment a year, it will still be able to keep growing enough that you can keep making withdrawals for as long as you need to in your retirement without your investment ever depleting itself down to nonexistence.

According to the 4% rule, if you saved up a million dollars, you would be able to withdraw $40,000 a year, and you would never run out of money.

Unfortunately, this isn't a rule that you can rely on anymore. Back in 2013, the Wall Street Journal published an article saying that it's time to "say goodbye to the 4% rule."

According to this article, with circumstances the way they have been in our economy as of late, this rule should be changed to the 2.8% rule.

That means that if you have a million dollars saved up, you can only withdraw $28,000 a year without it depleting down to nothing.

A million dollars sounds like a lot, but if you're only living off of $28,000 a year in retirement, it's likely that you won't feel like a millionaire.

Of course, this all depends on how long you live. If you don't expect to live very long, you could spend more money, but wouldn't it be better to live a long and enjoyable life without having to worry about your finances too much.

It is quite concerning that in this day and age, there are many people who are more worried about running out of money before they die than they are about dying.

You have to admit that $28,000 isn't much of an income to live off of in your retirement. Even $40,000 isn't the greatest if you are planning on living the dream of going on lots of vacations.

That just means that if you want to have more money than this to spend each year, you need to really dedicate yourself to putting money away for retirement now.

How Much Money Can You Withdraw From Your Investment Each Year Without Running Out?

Investment Account TotalYearly 2.8% Withdrawal





















Does two penny candy even exist anymore? How much will it cost ten years from now?

Does two penny candy even exist anymore? How much will it cost ten years from now?

Tip #3: Recognize How Much of an Effect Inflation Will Have on Your Buying Power

If you've been alive long enough that you're planning your retirement, or even if you've only been alive long enough to take your allowance to the store to buy a candy bar from time to time, you probably realize that the prices of almost everything just keep going up.

That means that if you were to look at your monthly expenses now, and then try to live the same quality of life a decade or so down the road with the same amount of money, you would discover that you simply didn't have the funds to keep up.

Many people don't take inflation into account as much as they should when they are trying to figure out how much money they will need in retirement.

If you are just barely scraping by now, and hope to survive on the exact same amount of money in retirement that you are spending now, the unfortunate truth is that you are in for a very rude awakening.

According to the United States government, the rate of inflation in the United States in 2014 was just under 1%

Does that sound a little crazy to you? Most people, at least those who do any shopping at all, can tell you without thinking about it that in general prices have been going up and rather quickly for that matter.

The United States government has a very interesting way of calculating inflation that is pretty good at making things seem better than they actually are, which is how they can come up with an inflation rate that is so low.

For example, groceries (along with many other essential commodities) aren't included in the inflation rate. That's probably why the inflation rate could have been so low last year while you were paying more for your groceries than ever.

The actual rate of inflation is probably between 6% and 8%.

Here is a calculator where you can see how much the purchasing power of a specific amount of money has changed over the years.

It's a good rule of thumb to expect the cost of living to double every 10 years, so if you are living off of $50,000 a year now, think about how many times you would have to multiply that to have the same quality of life by the time you retire.

That might sound crazy, but really, think about how much a car cost 10 years ago compared to now, or just think of how much more a gallon of milk costs now than it did ten years ago. You will be amazed.

When you put your retirement fund into perspective with inflation in mind, it might make your current funds and even the goals you've been shooting for seem a little bit more humble.

The honest truth is that most people's retirement funds don't even come close to the amount that they will actually need in order to retire comfortably if inflation continues as it has been recently.

It's a good rule of thumb to expect the cost of living to double every ten years, so if you are living off of $50,000 a year now, think about how many times you would have to multiply that to have the same quality of life by the time you retire.

Do You Really Have Enough?

So, now the question that you have to ask yourself is whether or not you are going to have enough money saved up for your retirement.

Now that you have figured out what type of lifestyle you want to have in retirement, it's easier to come up with an estimated monetary requirement to maintain that quality of life.

Now, go ahead and calculate how much money you would need to accumulate in order to meet your yearly needs while only withdrawing 2.8% of your total investment.

Lastly, take that number and then do the math to figure out how much you would probably need down the road with inflation thrown into the mix.

Dream Big and Plan to Succeed

It can be a bit intimidating to really dig into the numbers and try to figure out how much money you need for your retirement, and it can be discouraging if you are starting to realize that you don't have the financial security that you thought you did, but don't let yourself get down.

There are a lot of investments out there that are doing really well these days. Instead of worrying about how you aren't where you need to be financially, start working with a professional and figure out how you can get there.

Your dreams are possible. It's just going to take some planning to get where you want to be.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

Questions & Answers

Question: How much can you withdraw from a retirement account without paying taxes?

Answer: It depends on what kind of retirement account you're withdrawing from. Is it a pre-tax or post-tax account? There are also variables regarding the tax laws and whether you withdraw more or less than your yearly standard deduction. I highly recommend a book called "The Power of Zero" that does a great job of explaining how to minimize the amount of taxes you pay in retirement. It's full of useful information written in laymen's terms so that anybody can understand it.

Question: How much money do I need to retire on?

Answer: The amount of money you need for retirement really depends on what quality of life you want to experience in retirement. Do you want to travel the world? Do you want to stay home and relax? On top of vacation plans, it's also important to consider health changes you may experience in your more mature years. There are a lot of variables to consider, and then once you've calculated what you think you would need in today's dollars, inflation becomes a major consideration. You can realistically expect the cost of living to double every ten years or so, so inflation is a huge factor.

Question: What is the required minimum distribution once you reach 70-1/2 years old?

Answer: I'm attaching a link that I think you will find helpful:

I would definitely check in with your financial advisor to make sure you are doing your calculations correctly though. It would be a shame to receive a penalty due to withdrawing less than is required.


Bill Monroe from Sunny Florida on April 12, 2015:

The sad ones are often the funniest ones, have you noticed? I shall link to this article to prove the point of the cartoon.

Rebecca Young (author) from Renton, WA on April 11, 2015:

Haha! I love that cartoon! Awesome! It makes me feel kind of bad to laugh at such a sad situation, but I couldn't help myself.

Bill Monroe from Sunny Florida on April 11, 2015:

You've hit the nail on the head. You don't want to outlive your income:

Good advice if followed will make the "golden years" more golden. Thanks, Rebecca.

Shil1978 on April 06, 2015:

Helpful and enlightening. Unfortunately, most people would end up with too little, but as you say, planning is key. Well, I know what I'd be doing now. Thanks for this wonderful hub :)

Corey J Polesel from Delanson NY on April 05, 2015:

Enlightening and depressing. It confirms that fact that I will never be able to retire. oh well

Danny Miles from California on April 04, 2015:

Nice article! I'm only 26 but I'm constantly thinking about retirement and how much money I will need to live comfortably in my twilight years. It's never too early to start saving! Thanks for the advice and insight.


Melissa Orourke from Roatán, Islas De La Bahia, Honduras on April 02, 2015:

This hub is precisely the reason why we have purchased outside the U.S. Though, we are going to purchase a "home" in the U.S. Somewhere, for everyone in the family to enjoy! Informative Hub!

Lee Hansen from Vermont on April 02, 2015:

Helpful info for anyone trying to plan for retirement with decades left to prepare. I am about to retire on what is left of Social Security, a part time job, and the remnants of my once thriving 401K that has finally recovered to the same value it was just before the 9-11 disaster and economic meltdown years that followed. Hopefully I will have decent health; I don't have big plans to travel but I do plan to enjoy my time!

Ana Maria Orantes from Miami Florida on March 31, 2015:

I like your hub. Thank you for explaining the financial advices for future generations of older age. It is good to prepared for later years to come. Many individuals do not know how to do it. I am certain many people will benefit from your financial expertise. You are excellent and caring for others.

Rachel L Alba from Every Day Cooking and Baking on March 26, 2015:

This is an interesting hub and something all of us worry about as we reach retirement. I have been retired since I turned 64, 2 years ago, but my husband id 75 and is still working as a fireman. He is a pump operator so he is still able to do his job. I think this is the last year though. We are not used to going on vacations so that won't be a factor for us but we do need to live and pay our bills. I never heard of the 4% rule before, but it is something I am going to bring to my husband's attention. Thank you for all the information. I voted up and useful.

Blessings to you.

Rebecca Young (author) from Renton, WA on March 25, 2015:

Thank you so much for your input. I finished writing this pretty late at night and obviously didn't proofread as well as I should have. I think I got everything fixed now though. thanks again!

Joanne Lombardo from Prescott AZ on March 25, 2015:

I found your article very enlightening and somewhat scary as I realized how inflation will affect my retirement. The Stock market in the 80's was great, the last decade, not so great. If I had any advice for your article it would be, you can't proofread enough. There are two places where a small word is missing, that if it was there, it would make the reading easier. Fantastic hub, full of great information.