There are a lot of sites that help you determine **how much you need to save for retirement, **but I have never been comfortable with them because they usually don’t share the logic behind their calculations. Also, to really under what you need to save for your retirement, there are critical three numbers you need know: (A) how much money you need per year, (B) how much you should have in your retirement account, (C) the percentage of your income you need to save. To help you better understand how these calculations are made, here are the steps you can follow to do your own calculations.

These steps do not take into account all the caveats unique to your situation; however, the method offers a good starting point for your retirement planning.

## (A) How Much Money You Need Per Year at Retirement

### 1. Start with Your Current Yearly Expenses

If you think about what you’re able to live on today, you can figure out approximately what you can live on in the future (in today’s dollar)

**You will likely spend less on:**

**Saving for Retirement**– Let’s pretend that you make $50,000 per year and save $10,000 a year for retirement. When you retire, you don’t need to save $10,000 a year anymore, so you could potentially live on $40,000 per year.**Housing**– If you are a homeowner today, there is a good chance that you won’t need as much money for housing. For example, our escrow (insurance and taxes) is about 30% of our total monthly payment. By the time we retired, the house would be paid off and our housing expenses reduced by 70%!

**You will likely spend more on:**

**Medical Expenses**– As you get older, you tend to spend more on medical issues, or you might be paying for your own insurance instead of participating in your employer’s plan.**Extracurricular Activities**– Working all the time doesn’t leave a lot of time for you to spend money on activities and travel. When you retired, hopefully, you will be in a better position to spend some quality time traveling and doing activities.

Let’s assume everything balances out, and **you can live on $50,000 a year income**.

#### The 80 Percent Rule for Retirement

There is a popular rule of thumb among financial planners that estimate your retirement income equal to 80% of your current income will give you a standard of living that is substantially similar to what you are experiencing now.

You can also use this rule to quickly determine your retirement income amount. However, we went further in-depth and show you how to calculate your percentage more precisely.

**Read More:** The 80 Percent Rule for Retirement Explained and Improved

### 2. Adjust for Inflation

Now we have to adjust that $50,000 for inflation. According to the Bureau of Labor Statistics, the average inflation rate for the past 30 years has been about 3% (I am approximating the value based on the chart). So we can calculate what we need in…say 30 years with the following formula:

**Retirement Income** = Today’s $ * ((1 + inflation rate)^ Number of years to retirement)

**Retirement Income** = $50,000 * (1.03 ^ 30)

**Retirement Income** = $121,363

**This means you’ll need about $121,500 per year in 30 years** (inflation-adjusted and rounded up)**. **

You can also use a Future Value Calculator, like this one on Investopedia.

## (B) How Much You Need to Save for Retirement

### 1. Account for Other Income Sources

Remember that your retirement savings is not your only source of income. If you anticipate other income sources, you can subtract these amounts from your *Retirement Income* number. For example, let’s assume you anticipate the following income:

- Social Security Income = $20,000 (according to SSA.gov, your social security retirement benefits replace about 40% of your average earnings.)
- Pension = $15,000
- Rental Income = $25,000

You can subtract the $60,000 total of these other income sources from $121,500; therefore your *Adjusted Retirement Income* number is $61,500 — this is how much money your retirement saving needs to generate each year.

### 2. Calculate Target Retirement Saving

Using The Multiply By 25 Rule and the 4 Percent Rule, you can continue your calculation and determine how much you need to save. This is ideally how much you should have in your retirement savings right when you are getting ready to retire.

**Target Retirement Savings **= Adjusted Retirement Income * 25

**Target Retirement Savings **= $61,500 * 25

**Target Retirement Savings **= $1,537,500

**You need to save about $1.5 million to begin retirement!**

Well, don’t fall off the chair just yet…

Using this Investment Calculator at Calculator.net, **you could potentially save $1.5 million in 30 years by investing about $900 a month** in the Stock Market (assuming 9% annualized return). This $900 a month represents about 21.6% of your income, so you do have to hustle a bit to get there.

## (C) What Percentage of Your Income to Save for Retirement

Now that you figured out how much income you need when you start your retirement, and about how much you need to save for retirement, let’s figure out what percentage of your income you need to save for retirement.

You could use the number you calculated in Step #2 and the Investment Calculator at Calculator.net to repeat the process above to determine what you need to save each year. You’ll have to play around with the numbers a bit to get it right.

I’ve put together a spreadsheet to help you with the calculation to make it easier for you.

I set up the spreadsheet to reflect the example we have been using in this article. The numbers are slightly different due to rounding.

#### Start Saving Sooner

The above scenario assumes you have 30 years to save, what if you start sooner?

- Start at 20 with 45 years to invest, you only need to save 11.26% of your income.
- Start at 25 with 40 years to invest, you only need to save 14.00% of your income.
- Start at 30 with 35 years to invest, you only need to save 17.16% of your income.

## Comparing Against Online Calculators

### Vanguard Retirement Income Calculator

I entered the same numbers as our scenario in the Vanguard Retirement Income Calculator and got the following result.

The main issue I see with Vanguard’s calculator is that it doesn’t adjust for inflation — so you might be falling short by the time you hit retirement age.

### SmartAsset Retirement Calculator

You can also use the SmartAsset Retirement Calculator below. Again, I entered similar numbers in their calculator. The good news is that this one considers inflation (you can make more adjustments with the full version Retirement Calculator).

SmartAsset calculates retirement income requirement at a much higher amount of $169,560 per year, yet it indicates that you only need to save $552,178 because they are assuming you have other sources of income such as Social Security, pensions, savings and investment drawdowns (whereas we don’t in our calculation).

## Bottom Line

It is nice to be able to search online and plug in the numbers to see what you need for your retirement savings, but I think it is important that you understand how to calculate the numbers on your own because each calculator uses a different set of rules and assumptions. If you don’t try and compare several different calculators, you might be led into a false sense of security that the numbers presented are good and accurate.

## Recommended Articles

**Pinyo Bhulipongsanon **is the owner of *Moolanomy Personal Finance* and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.

Ah – I see retiring as a last resort – lol. So you know I half-heartedly put anything into my 401k… ^_^

I don’t see interest included in the calculations here. Even at 4%, *just the annual interest* on 1.8 million will cover your annual needs. Not that that’s a bad thing, you’ll still have 1.8 mil left when you die. If you plan to use up all your money in retirement the necessary amount would be quite a bit lower.

Many people forget to adjust for inflation and I’m glad you’ve pointed this out. That’s why final slary schemes are great because the adjustment is already made, but in private pension planning you definately need to do this.

My money number is 3 million baby! I’m easily hitting 4 million if I stay the course with my current contributions. Index funds baby, the only way to go. Like others have said, most people don’t think about the interest alone with this much money. Think about it, how much do you really need, you’re old, will you really need that much anyways?

This is the simplest and most easily understandable demostration of caluculating how much money is needed for retirement I have ever seen.

I think simple is crucial because more people need to make this calculation (everyone should). Simple is really all you need because the variables require assumptions that make detailed calculation no more accurate than a simple one.

Thanks you.

Here is an easy way to adjust for inflation and calculate your nest egg in today’s dollars. Simply estimate inflation, and subtract that from the projected growth rate of your money. So for example, if you project inflation to be 3.5% and your money growth rate at 8.5% then use the future value calculation with a growth rate of 5%. That gives you inflation-adjusted value in today’s dollars.

The SWR study only looked at a 30 year period. If you are retiring at 45 you need to use a lower number.

Investment returns typically aren’t 8.5% year in and year out. That’s why they studied what would happen in various sets of years. And why you can’t just spend 5% and call it good. Unless you are ready to lower your standard of living if the market goes down, you need to leave yourself a buffer against risk.

I guess the value for the property would also increase with a much higher growth rate (Property’s Capital Growth). So paying the mortgage and selling off at the required retirement amount within the next 35 years would be easier. I know a family who bought a 3 flat investment property near a university for $35,000 (on mortgage though) and after 15 years retired and paid off $10,000 from Pension and is currently earning $3,000/month rental income and the property can be sold in market today for close to $500,000. I guess property investment is wiser for faster and permanent growth.… Read more »

I am not sure how to use the spreadsheet simple calc as all my yearly expenses are covered by Social Security and pensions that amount to $65000 a year. I intend on retiring at 62 – 2 years from now. My retirement savings is just over $1,000,000 not including my home. I have 3 annuities out of the $1M about $300k that will start paying out in 10-12 adding maybe another $20K a year. I am hoping I still have enough in my nest egg to cover it all? Does anyone see problems with it. I am currently unemployed but… Read more »

How on Earth are you suppose to save $3 million? If you start your 401k at 25. How much a month should you put in it to get to that amount?

Retirement plans are great idea, but only in a very prosperous economy. My High Yield account has barely made 5% over the past 10 YEARS. I think investing in a business that will make you money and give you a little job security is a better idea. Brokers and people with a LOT of money in the market are the only ones that can generate lots of revenue-with large capital. I was in the military 1998 and they were trying to sell us on investing in US Savings bonds saying if you bought one a month ($100) starting at 18… Read more »

@Raaj – The answer is depend. I think it’s a wiser decision to buy investment property with positive cash flow upfront (instead of depending on appreciation that’s above inflation). There are plenty of people who got the opposite result with investment properties in the last decade. @Mike – It looks like you are in a great shape. Your SS and pension already put you ahead of most people. The $1 million and your home are good safety net on top of the income. You and your wife will be living for a long time, so it’s worth consulting a financial… Read more »

$3 million saving for retirement… That sounds like some serious discipline might be required to reach that goal.

This is a straightforward outline that I’d like to send around to a few people as well. However, it adds to the angst of the entire retirement saving process. So many people avoid this topic because of those projections, let alone taking into account inflation. The amount of fear and stress around planning for the future is unbelievable.

Pinyo, I have always noticed that the downside to these “how much I need to retire” calculations assume you will be receiving no more income when you retire therefore you need a very large pile of money.

However, if part of your retirement plan is also how to accumulate assets that produce income (i.e. real estate) then that pile of money does not need to be so large and/or you can retire earlier than you think.

I’m trying to figure my amt and don’t know what the symbol between 1.035 and 30 means in the formula in Step 2. It doesn’t seem to be multiply, divide, or add, and my math skills are too weak to back into it. Thx.

For how many years of retirement is your formula (answer) in Step 3 assuming?

Pinyo, I could not understand the multiplification factor of 25. Can you pls explain.

If you begin saving at age 25 and want $2.8M in retirement at age 65, based on a 7% savings interest rate and monthly compounding interest, you will need to make contributions of $2394.28 each month. At a salary of $50,000 and assuming a 20% tax rate, you have a net pay of $939 per month to live off of. Good luck!

(These calculations don’t take into account increasing income or contributions)

For how many years of retirement is your formula (answer) in Step 3 assuming?