Trying to figure out how much money you will need to retire can be one of the most difficult financial questions to answer. It’s a critical question to address the older your get because while you may be able to live off of nothing but Social Security in your older age (millions of people do it), it won’t be very enjoyable. The average monthly payout is right around $1,300 these days, and that does not go far.

So beyond Social Security, how much money will you need? Unfortunately, since everyone’s spending habits are different, there’s no single magic number. A standard benchmark many people toss out is $1 million to $1.5 million, but a goal of a million dollars is sure to be a source of dread and panic for many people, especially the one in three Americans who have nothing saved for retirement at all. Use our Retirement Calculator to evaluate your current retirement savings plan.

If the million-dollar mark seems eye-popping and out of reach, throwing up your hands and deciding to deal with it later is the worst thing you can do. No matter how old you are, know that it’s never too late to put some savings back for retirement. If you’re not sure where to begin, there are some guidelines to help.

Retirement Planning. Source: Getty

How To Figure Out How Much You’ll Need In Retirement

Planning a retirement goal boils down to one task: estimate how much money you’ll be spending and then estimate how long you expect to need that money. Sounds easy, right? Here’s a look at some numbers in action.

There are three general guidelines for calculating a retirement goal:

• The 25 times rule of retirement: The first way to get a quick estimate of how much retirement funding you will need is to calculate your annual expenses in retirement and plan to spend that amount for about 25 years. The logic behind this method is that you can withdraw about 4 percent of your nest egg each retirement year without being in danger of losing your money.
• The 70 percent rule of retirement: A second way to estimate your retirement needs is to plan on needing about 70 percent of your average income during your working years for as long as you live post-retirement.
• The 15 percent rule of retirement: The “15 percent rule” is simple when it comes to retirement, but it’s only one you’ll want to apply if you will be or have been saving for a long time, beginning in your twenties or early thirties. In general, saving 15 percent of your income from a young stage should give you enough to live well in retirement. The most significant benefit of this method is that it keeps you from worrying about hitting a specific mark. Just set this money aside over the years and let it grow. Of course, if you begin saving later in life, the 15 percent rule may be too low.

Following the first rule, if you spend $20,000 a year, you’ll need about $500,000 to retire comfortably – a number that seems a lot more attainable than the $1 million mark. Going by the second rule (using a median individual income of about $35,000), you arrive at just over $600,000 need for retirement (70 percent X 35,000 + 25 years). If those numbers still seem like they are unreachable, it’s important to remember that a significant portion of that balance comes from your funds growing over time. You do not have to save $500,000 to have half a million dollars in retirement.

Expect Your Finances To Be Noticeably Different Post Retirement

It may sound obvious, but keep in mind that your spending habits during retirement will be very different from your spending habits while you worked. That doesn’t necessarily mean spending less though. Work-related expenses will go away and you may have your home paid off, but costs for healthcare, expensive hobbies and travel will probably go up.

Any income you have will be different, as you’ll no longer be paying Social Security and Medicare taxes (effectively a 7.5 percent raise) (Related: Is Social Security Income Taxable?). You will likely be in a lower tax bracket, and you won’t be taking out retirement savings, which means your paycheck will go farther. However, the point of retiring is to be, well, retired, so many find that they’re not happy working even part-time.

In nearly any study, retirees say they spend more than they thought they would, so don’t plan on spending dramatically less than you do now.

How long should I expect my retirement to last?

It’s not a question anyone likes to address, but thinking about how long your retirement will last is another crucial factor towards hitting your goal. Did your parents, grandparents, and great-grandparents all live to be over 90 years old? Then you might want to plan on a little longer retirement if you’re in good health.

It’s also important to understand the role that Social Security plays as part of your post-retirement income. If you’re interested in seeing what you can expect to draw when you retire, the Social Security Administration has a number of calculators to help you figure out your potential benefits.

While knowing the exact amount of years you’ll need to fund during your retirement is impossible, you can make a fairly good educated guess with a little research. Here is what popular investment firms and resources suggest.

• The Motley Fool financial website suggests planning for around 30 years for retirement saying one in four 65-year-olds will live past 90 and one in 10 will live past 95.
• Fidelity recommends a withdrawal rate of no more than four or five percent of your savings during your first year of retirement, adjusting for inflation after that. It gives the example of someone who retires at 65 with $500,000 in savings. She decides to withdraw four percent ($20,000) each year for expenses using that amount as the basis for future years. Each year she would increase the amount by inflation.
• Vanguard suggests a 65-year-old man has a 41 percent chance of living to age 85. That chance falls to 20 percent of living to age 90. Likewise, a 65-year-old woman has a 53 percent chance of living to age 85 with that chance falling to 32 percent for age 90. Vanguard mentions if you’re a couple, there’s a 72 percent chance one of you will live to be 85.

Bottom Line:

Figuring out how much you’ll need to retire is much more about hitting your individual goal than an arbitrary number that fits for everyone. If you want to live it up in retirement, traveling around the globe and eating lavishly, you’ll obviously want to have a goal on the higher end. If you’re comfortable with living low key, a target of around $500,000 will very likely let you live comfortably in your golden years.

There are a lot of “what ifs” when it comes to retirement, but you can still prepare by taking some basic steps. Retirement is often called “the most expensive thing you’ll ever do,” but if you take time to see what you’ll realistically need, you can plant ahead and retire with peace of mind.

—Source: RetirementLiving.com