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How to Calculate Your Retirement Savings Needs

November 9th, 2023 | 4 min. read

By Advance Capital Team

couple calculating retirement savings

When it comes to retirement, one of the most pressing questions you’ll face is, ‘How much do I need to save?” Calculating your retirement savings needs isn’t just a number-crunching exercise; it’s about envisioning your future lifestyle and ensuring you have the means to support it.

Since 1986, Advance Capital Management has guided individuals in planning for a secure retirement. We understand the importance of clarity in retirement goals and are dedicated to helping you map out a precise path to your financial future. If you’re interested in learning more, check out our retirement planning services.

Here’s a guide to help you estimate how much you need to tuck away for your golden years.

Understand your time horizon

Your retirement savings goals hinge significantly on your age and the expected time of retirement. The earlier you start saving, the more time your money has to grow through the power of compound interest.

Consider this: someone who begins saving at 25 will generally accumulate more by retirement than someone who starts at 35, even if the latter saves more money each month. Determine how many years you have until retirement to understand your time horizon.

Estimate retirement spending needs

Most financial planners suggest that you'll need approximately 70-80% of your pre-retirement yearly salary to maintain your standard of living when you retire. This rule of thumb accounts for the fact that certain expenses (e.g., commuting costs) may decrease, while others (e.g., healthcare) might increase.

To get a more tailored estimate:

  • Track current expenses: Begin by understanding your current spending. Categorize your expenses into needs, wants, and savings/debt repayment.
  • Adjust for retirement: Eliminate expenses that will decrease or disappear in retirement, such as work attire or mortgage payments if you expect to have your home paid off. Conversely, add expected new expenses, like increased travel or healthcare costs.
  • Consider inflation: Remember that inflation will increase your cost of living. A retirement savings plan must take into account the rising cost of goods and services over time.

Predict retirement income

Apart from savings, you may have other sources of income in retirement, such as Social Security, pensions, or part-time work. Calculate these expected income amount to subtract from your annual needs. If there’s a gap between your income and your needs, your savings will need to fill it.

Start with the 4% rule

The 4% rule is a popular retirement planning heuristic. It suggests that you can withdraw 4% of your retirement portfolio in the first year of retirement, and then adjust that amount for inflation each year thereafter.

Theoretically, this would allow your savings to last for 30 years. For instance, if you need $40,000 from savings in your first year of retirement, you'd need a $1 million retirement portfolio ($40,000 is 4% of $1 million).

However, it’s crucial to remember that each individual’s financial situation is unique. Depending on various factors specific to your circumstances, you might find that you can safely withdraw more or adjust to withdrawing less. Adopting a flexible withdrawal strategy – taking out more in financially strong years and conserving during downturns – can help balance your retirement fund’s longevity with your lifestyle needs. Learn more about how a flexible withdrawal rate works with this article.

Account for health care costs

Healthcare is often one of the largest expenses in retirement. Fidelity Investments estimates that a 65-year-old couple retiring will need an average of $315,000 saved (after tax) to cover healthcare expenses in retirement. Evaluate your health, family medical history, and potential long-term care needs to factor these costs into your plan.

Consider life expectancy

It’s essential to consider how long you might live, given that you don’t want to outlive your savings. According to the Social Security Administration, a man reaching 65 today can expect to live, on average, until age 84.3, while a woman is likely to live until 86.7. Plan for a longer life to ensure that you don’t fall short.

Evaluate risk and investment returns

The expected return on your investments plays a crucial role in how much you need to save for retirement. A more aggressive investment portfolio may lead to higher growth but comes with more risk. Conversely, a conservative portfolio is less risky but may require you to save more since the growth potential is lower.

Put it all together: Retirement calculator vs. financial advisor

A retirement calculator can be a useful starting point, giving you a ballpark estimate of how much you might need to save for retirement. It’s a tool that can help you begin to understand the complex interplay of savings rates, investment returns and retirement timelines.

However, retirement calculators do have their limitations. They often work on fixed inputs and standard assumptions, which may not account for the unpredictable nature of life’s events or market fluctuations. Calculators lack the personal touch – they cannot understand your unique situation or adapt to changes in your life and financial circumstances. They typically don’t account for specific tax situations, changes in health, or unexpected expenses that can all affect your retirement savings needs.

In contrast, a financial advisor does far more than spit out numbers. They provide a comprehensive review of your financial situation, offering stress-testing and projections that consider various economic scenarios. With a financial advisor, you can compare different scenarios tailored to your goals and needs, understanding the implications of each choice you might consider.

Most importantly, a financial advisor can develop tailored strategies to enhance your chances of a comfortable retirement. Whether it’s adjusting your investment approach in response to market changes, advising on tax-optimization strategies, or assisting with estate planning, a financial advisor offers the expertise and personalized guidance that a calculator simply cannot match.

Choosing to work with a financial advisor means opting for a dynamic and personalized plan over a static and impersonal calculation. It’s about having a partner who helps you navigate the complexities of retirement planning, making adjustments as your life evolves, and ensuring that your retirement plan is as resilient as it is robust.

If you’re nearing retirement and would like to get an estimate of your retirement savings needs, schedule a free consultation with an Advance Capital Management adviser right now.

Advance Capital Team

Advance Capital Management is a fee-only RIA serving clients across the country. The Advance Capital Team includes financial advisers, investment managers, client service professionals and more -- all dedicated to helping people pursue their financial goals.