D. Paterson Cope Answers a Common Question: How Much Do I Need to Retire?

It’s often easy for people to dream about the retirement they want. This might include extensive travel, spending extra time with loved ones, and taking up a new hobby, according to financial planner D. Paterson Cope.

What’s not as easy is actually creating a plan to make that retirement dreams a reality. One of the most common challenges people face in doing this is figuring out how much they’ll need to support themselves financially.

Here are some ways that you can figure out how much you need to retire, and the factors that go into figuring out your number.

Save a Multiple of Your Income

One simple way you can use to determine how much you need to retire is to use a multiple of your salary. For example, a starting goal may be to save 1x your salary by the time you’re 30 years old. So, if you earn $50,000 at 30 years old, then you should aim to save $50,000 toward your retirement by that time.

At the age of 67, a good goal would be to save 10x this starting salary. In this case, with a $50,000 starting income, you would hit your retirement goal by saving $500,000 by the time you’re 67 years old.

You can make adjustments to this based on your planned retirement age. If you want to retire at 65, try saving 12x your income. If you plan to retire at 70, you could reduce that multiple a bit.

Work Backward

The above method is simple and straightforward, but it’s not always a great indication of whether you’ll have enough money in retirement. It’s likely your income will increase as you get older, and as a result, how much you’re used to living on will increase as well.

So, another approach is to work backward: Figure out how much you expect you’ll spend in retirement, and then make sure you save that much. Factor in costs for housing, food, health care, transportation and ancillary spending.

Once you come to a monthly number, you can calculate how much you’ll need on an annual basis. From that number, you can figure how much of a nest egg you’ll need to afford that lifestyle.

The Percent Rules

A third option is to use a hybrid approach to figuring out how much you need for retirement. You can do this by following two tried-and-true retirement “rules” — the 80% rule followed by the 4% rule.

The first step, as D. Paterson Cope explains, is to use the 80% rule to figure out how much income you’ll need in retirement on an annual basis. Your income before taxes in retirement should be about 80% of your pre-tax income before retirement. If you earn $50,000 a year, then, your retirement income should be $40,000 a year.

This gives you a good idea of how much you’ll need each year to live in retirement comfortably. From this, you can figure the total nest egg you’ll need by using the 4% rule.

This rule helps you determine how much you’ll need in total to generate $40,000 a year in retirement income. To complete this calculation, divide the desired retirement income on an annual basis by 4%. This example would result in you needing a retirement nest egg of $1 million.

Of course, there are exceptions to this rule. The 4% rule assumes that you’ll earn 5% on your investments after inflation and taxes and that you don’t have any other retirement income sources such as Social Security.

Even so, using these rules — or any of the approaches above — will give you an idea of how much you need to retire.

1. Paterson Cope
2. Paterson Cope, CFP® is the founder and CEO of Cope Private Wealth, a financial planning and wealth management firm specializing in assisting retirees and people who are about to retire. D. Paterson Cope has been providing financial advice for more than 30 years. He first earned the designation of Certified Financial Planner (CFP) in 1997. When he isn’t working, he enjoys spending time with his wife, Jennifer Miree Cope, and the rest of his family in Mountain Brook.