How Much Money Do You Actually Need to Retire?

A Stress-Free Life is the GoalHave you ever plugged your information into a retirement calculator on a site like  If you have, you’ll find their starting point for your retirement income is your current income, which I suppose makes sense if you’re one of the vast majority of people who spends every last dollar you earn.

In that case you would need to replace your entire post-tax current income with retirement income since you are living so close to the edge that you use every last dollar to prop up your lifestyle.

But being realistic, what is the chance that someone who spends every last dollar of their income has anything remotely close to the millions put away in their 401k in order to replace their entire current income?  Zero chance!

For those who read this website and have started to implement some of the suggestions, you’re hopefully saving at least 20% of your income (and maybe much more).

Now let’s look at what you actually need in order to retire:

Start with your current yearly spending, which hopefully you’re tracking.  It’s really easy to do this with a website like, Personal Capital or even just track it in Excel like our family.

Your actual yearly spending is your starting point, not your income level, which is why it is crucial that you track it.  I would then go under the assumption that your mortgage payment will be gone by the time you retire, so back that out of the yearly spending column to come up with a total amount of yearly expenses.

Now multiply that number by 25 and that’s the amount you need to retire.

Why do you multiply by 25?  Most experts say you can safely withdraw 4% of your total investment balance each year and still have it exist for decades (or even in perpetuity if returns are as expected).  The anticipation is that investment returns on the balance will more than offset the 4% you take out each year to cover your expenses so not only will the balance cover your expenses but it will likely continue to grow.

Our yearly expenses for 2013 were well under $40,000, but we’ll use that as a nice round number even though I think it is inflated.  Multiply $40,000 by 25x and we will need exactly $1,000,000 to retire once our house is paid off.

$1,000,000 sure sounds like a lot of money, right?  Not really when you dig into it:

Let’s say you and your spouse each started off making $45,000 per year and that stays constant throughout your working life (no raises).  If you each saved 15% of your income and got a 5% employer match in your 401k you’d be saving 20% of your income.  This would amount to $1,500 per month (though a quarter of it is completely free from your employer, so it feels like much less than that out of your pocket).

If you invested this $1,500 each and every month in a low-cost index fund (we recommend Vanguard) and it grew at 8% annually, it would take 22 years for this amount to grow to over $1,000,000.

Twenty-two years might sound like a long time, but if you started fresh out of college, you’d be 44 when you were set to retire!  That’s a whole lot better than the bleak future most spend-happy baby boomers are looking at now in their 60s and 70s.

And this is all assuming you never got a raise and only saved 15% of your income on your own (plus the match).  How much faster could this have been done in you saved:

25% plus the match?  18 years total.

35% plus the match?  15 years total.

Throw in some raises and/or higher salaries and you can reduce those amounts even further!

These are amazing numbers when all we hear in the media is how impossible it is to retire. All you have to do is keep your expenses low and save a reasonable amount of your income in order to retire 15 to 20 years after you start saving.  It really is that easy.

And even if you are more conservative than this article suggests, and you want to have 30 or 40 times your annual expenses in your retirement account (not an unreasonable position at all!), the concepts are the exact same:  Save as much money as you possibly can, and keep your expenses as low as possible, because they determine how much you need to retire, not your income level!

If you want to read about people who really retired early by keeping their expenses low and their savings rate high, check out the Mad Fientist, Root of Good, Mr. Money Mustache and Pretired.  And 1500 Days and Bucking the Trend aren’t far behind…

Note:  We try to keep things simple on Richmond Savers and not get bogged down in details that are too incredibly complex, but the first question I know I’d ask if I read this article is:  “Okay, so you’ve convinced me how I can save enough to retire decades earlier than normal, but how do I actually access this money before I’m 59.5 when I’m allowed to pull it out of my 401k/IRA without a penalty?”

There are two methods that I know of, and I’ll let the people who introduced them to me explain:

The Mad Fientist explains the Roth-IRA conversion strategy

Justin at Root of Good explains the Substantially Equal Periodic Payments (SEPP) method

Comment Disclaimer:

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  1. says

    Thanks for the mention, Brad! I’m leaning more toward MadFIentist’s Roth IRA Conversion ladder right now (even though the substantially equal periodic payments method would also get the job done with less flexibility).

    • says

      Sure thing — I always enjoy reading your site!

      I thought that was the case with the Roth IRA conversion ladder, but I wanted to present the options in any event and I thought you did a nice job of explaining the SEPP option. I agree that the Mad Fientist’s Roth IRA method is a really nice choice and so elegant in its flexibility…

  2. says

    Thanks for the mention, Brad! I wouldn’t say I’m fully retired yet, but your point is fully valid. My head wants to explode every time I see one of those web sites saying people need 80% of their current income to retire. How could you know that without knowing a person’s spending rate and current income?
    Great post!

    • says

      It’s crazy, right? The spending rate to me is the absolutely most important aspect of the equation and that is so often left out!

      Glad you liked the article :)

    • says

      Thanks, glad you like the post! I mention your site all the time to essentially everyone I know — glad to do it…

      The NY Times mention was amazing, and I appreciate the congrats! That was certainly a thrill of a lifetime to be mentioned prominently in a popular article in my favorite newspaper :)

  3. says

    I definitely agree that the spending rate is the most important and yea that 80% standard is crazy. In retirement, I don’t plan on saving for retirement, I won’t be commuting to work, and will have more time for DIY so why should my spending stay that high. So how close do you think you guys are to retirement if you don’t mind me asking? And how would that equation have changed if you stayed in Long Island. I don’t see us moving out of the area because of family and friends, but sometimes the cost of living here in NYC frustrates me.

    • says

      Yeah, they really have it all backwards! You aren’t paying large rates of tax, you aren’t saving for retirement any longer, you aren’t paying your mortgage, etc. etc.

      I don’t know how close we are to retirement to be perfectly honest; it certainly isn’t imminent, but it is quite realistic in 10 years or less (if that’s what we decide to do at that point). We have a lot of moving pieces with Laura currently not working full-time until our youngest goes to school in about 3.5 years. We’re doing quite well, but you never know where the market will go and such, so it definitely is not imminent.

      To answer your more substantive question, we would be nowhere close if we still lived on Long Island! Instead of being less than 10 years out in a perfect world, we’d be lucky if we could retire in 20-30 years. And there would have been no way Laura could have taken 9 years off to raise our daughters, so that’s a huge quality-of-life factor going in Richmond’s favor. It is just so easy to get ahead here and still live a nice comfortable middle-class life, and we always would have given something (or multiple things) up living on Long Island.

      It was very hard to move away from family and friends, but it is a decision that has afforded us financial flexibility and wealth that would have been impossible with a $400,000 mortgage and $10,000/year taxes — not to mention all the other crazy costs of living up there…

  4. says

    I love the simplicity of E.R. – like you noted, if you save a decent percentage of your income consistently, you reach incredible levels of wealth.

    But I have my doubts that the 4% rule is appropriate for early retirees (or maybe even traditional retirees). Jason Hull has some sobering posts on the subject (the last one has some specific insight for early retirees):

    • says

      I’ll check those articles out soon — thanks for sharing the links!

      I agree that the 4% might not work in all cases, which is why I put in the paragraph about being more conservative and wanting 30x-40x yearly expenses to feel safer. I always like to make my articles more about the larger point than about the details. Because really, once people start lowering their expenses and saving 20%-40%+ of their income each and every year it all really will come together much quicker and with larger levels of wealth than they could have every imagined!

      And from there it really is about just picking when you feel comfortable retiring. Do you wait until you have $1.0 million or $1.5 million? Not a bad decision at that point when you have amassed the $1.0 million than if you were still sitting at $0 of net worth!

  5. says

    Sadly my employer did away with the company match years before I got a job there, but my husband’s company still offers it. It’s a great perk and helping us get much closer to the 20% mark :)

    • says

      That really is unfortunate! The employer match is a great bonus for those whose companies offer it. I’m fortunate to work for a company that really treats its employees well in that regard, so it makes saving money for retirement a lot easier. Great that your husband’s company offers one!

  6. says

    For the longest time we simply saved retirement without any specific goal number defined. We had to stop contributing to our retirement accounts while we’ve been paying off our credit card debt and getting our finances back in order over the last 4.5 years, but now our attention is turning to ensuring our future is taken care of. Now, it completely blows my mind that we didn’t sit down with someone and figure out how much we should be targeting for retirement….if we don’t know what our goals are, how can we possibly think we’ll be ready to retire ever? it’s also a target number that may change over time, for constant re-evaluation of your retirement target is necessary as well.

    • says

      Great points Travis — thanks for the thoughtful comment! Even if you didn’t have a goal in mind while you were contributing, the fact that you were saving for retirement puts you way ahead of so many people. Now that you have your debt paid down, do you expect to set aside a significant amount of money each month towards retirement?

      To your point, this absolutely is a changing ‘target number’ and I don’t mean to say in this article that it is a set number by any means. It will always be a function of your current and future anticipated spending, but in my opinion it is in no way a function of your current income. That to me is an irrelevant number in the calculation.

      I feel like so many people get overwhelmed when they see they need millions of dollars, per one of those retirement calculators, to ever retire and that causes them to not even save in the first place. If you keep your expenses low and your savings level high, amazing things will happen!

  7. says

    One thing I think makes things complicated is that it’s hard to predict what the future will be like and how things will change. My life today will be very different than what it’ll be like in 15 years, when kids and a house are in the picture. I wonder what the average increase in expenses are by decade (20s, 30s, 40s, retirement). That would make it a lot easier to plan!

    • says

      Agreed that of course there are a lot of variables and things you just can’t plan for over a 30-50 year period. That said, I know for sure that if you continue to save and continue to reduce your expenses, that’s a path that almost guarantees financial success…

  8. says

    Good article, but I think most people underestimate their retirement needs. One will be shocked to find out during retirement time how one is taxed three times when one needs money from one’s golden age retirement fund because the account really belongs to the Government, IRS, medical and professionals whom have designs on your savings account when one is old and feeble to know better. So why does the government keep promoting flimflam retirement programs whose returns fluctuate every four years at election time? The answer is simple: These programs are designed for American suckers who can’t afford to play the insider games of the wealthy whom do not want to pay taxes and never have to plan for retirement because they save their money in Cayman Island banks.

    • says

      Thanks for the comment — I appreciate you stopping by. I don’t take as cynical of a look at the system, but I do understand your frustration…

      For everyone out there, the control is within your grasp: Just save money and cut your expenses and you control your life, not someone else.

      We can all quibble over the exact amount of money you need to retire (25x expenses, 30x, 40x, etc.), but the simplicity of the situation doesn’t change one bit.

  9. JMK says

    In my late 20s I tried one of those stupid retirement calculators that said we needed nearly $2 million to retire. That was about the most discouraging thing I’d ever seen. All through our 30s we carried on contributing 15% because “we were supposed to” according to all the common advice, but our hearts weren’t really in it since we figured it was never going to amount to enough. Then a lay off ~7yrs ago forced us to cut dramatically for the short term until the job was replaced. While a layoff is stressful, it was the best thing that ever happened to us. It taught us that we could cover the very basic necessities on about 55% of our prelayoff dual income. Wow, so where had the rest of the money been going? Nonsense, junk, and a lot of stuff other folks enjoy and consider perfectly normal (restaurants, clothing, careless grocery shopping, etc etc). The job was quickly replaced but we’ve never gone back to our old ways. None of that extra stuff was every really important and now we realized how much we could actually be saving for retirement. About the same time we also wised up to the math of early retirement and decided to put as virtually all of that excess income toward paying off the mortgage and ramping up retirement savings. If we could live comfortably on 55% of our income with a mortgage, commuting expenses and kids still at home, then why on earth when all those expenses are gone would we suddenly need 70% of our income in retirement as those calculators suggested? Complete nonsense. We’re now working toward early retirement in our mid/late 50s. We could have been retired by 40 if we’d known all this in our early 20s, but I guess better late than never! You can bet our kids are all well informed. They may choose to save “only 15%” and work until 65, but at least they’ll have chosen that path and not mistakenly thought it was the only option.
    Here’s some fun math: for every $100 you trim out of your monthly spending, not only can you contribute $1oo more to your savings, but better yet you’ll need $30,000 less saved for retirement. It takes $30,000 to generate $100/mth of interest income. ($100×12=$1200 per year; $1200×25 = $30,000) Really makes you pause and think about how much you want to spend on anything non-essential doesn’t it?
    Also, I see you don’t make any allowance for government benefits covering a portion of your projected retirement income. I hear people gripe about whether or not benefits will be available in the future but I don’t really have a good sense of the true state of the pension system in the US. Here in Canada, the last projections I heard was that everything was well funded for at least the next 75 years. So if that’s the case and we can count on over $1000/mth/person, we’ll actually need only a small portion of our retirement savings to cover the rest. It’s best to assume the worst and plan on no benefits, but realistically we’ll wind up with a relatively cushy retirement.

    • says

      This comment is a great addition to the site — thank you for taking the time to post it! Your question, “Wow, so where had the rest of the money been going?” is one of the single most important questions people should be asking themselves! Because there’s really no answer other than that it is going towards needless junk and waste in most cases.

      I think I may write an article just on your $100/month = $30,000 in retirement savings. What an incredibly stark way of looking at it. I like to think I’m pretty good at breaking personal finance down to its essence and making things easy to understand, but I can’t say I have every thought about it in terms that clear. Thank you!

      I think there’s a high likelihood that social security will exist in some manner when I’m ready to collect it, but the safest bet is to assume $0 and be surprised when you get the expected income.

  10. Anne says

    When you say to track your current yearly spending (and then multiply that by 25x or 30x), is that to include the expense of the all the taxes we are paying (in the form of being taken out of our paycheck going to federal, state, city)? Since we will have to pay taxes on our investment income I imagine this has to be included, no?

    • says

      Hi Anne,

      Yes, taxes absolutely factor into this equation — thank you for pointing that out.

      I try to be as broadly helpful as I can be with these articles with the effort to get my main point across, but unfortunately this often leads to a less than full analysis for the sake of not losing people with all the details. My main point with this particular article was not to say definitively that you just take your expenses and multiple by 25x and that’s that regardless of other factors that could complicate things (taxes, inflation, investment returns, etc.).

      I was just trying to get across the concept that it is your expenses that really matter more than anything. If you can keep them to a manageable level, then you’ll need a whole lot less in your retirement accounts than others would have you believe.

      If you do follow my advice though and keep your expenses to a minimum, you would expect your tax liability to be quite small. Say your expenses were $40,000 per year and you’re a retired married couple who just turned 60. You’d pull $40k out of your 401k/IRA and this would be taxable. However, you’d reduce that by your standard deduction and your personal exemptions and your taxable income would only be $20,000 (based on 2013 data). Your federal liability on that would only be about $2,100.

    • says

      Yeah, that’s completely fair. I’d love to have some extra money coming in if possible, but I do know for sure that if i keep my expenses low that it is a near certainty that my money will last. So I’m happy about that :)

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