How Much Do You Really Need for Retirement?

The news likes to bandy about the $2 million figure when predicting the amount the average American will need for retirement. These one-size-fits-all predictions don’t really work, though. $2 million could last a person in low-cost area quite a long time, but run out quickly for someone who previously earned a high income and lives in a high-cost area (like, say, Los Angeles.)

How Do You Determine the Amount You Need to Retire?

What’s the right number then? According to Money you shouldn’t worry about the number, so much as saving a good amount every month. I tried to use both their tool and the Fidelity tool they recommend and got wildly different answers.

The Money tool said I would need just under $2 million. The Fidelity tool wants me to save $4.5 million. That’s a pretty big difference. So which one is right?

It’s hard to say. Both tools allowed me to input annual raises, but those are hard to predict. Unless you plan to stay at your current job until the day you retire, you don’t know how much your income will increase from year-to-year. If you work for a generous company, you could see bumps of 10% a year. Another company might only give 4% bumps. And what if you change jobs? What sort of increase does each job change come with? My husband’s last job change came with a 28% raise. Will that continue to bear out?

Savings are a problem though. Both would only let me input a flat figure of additional savings. I couldn’t get it to adjust to always be 10% of my income, which means my final total always lagged behind.

These tools are probably only good if you’re about 15 years away from retirement and have a better idea of what you can save. If you’re looking ahead 30-35 years like me and my husband, it’s all up in the air.

Use a Percent as a Goal, Rather than a Number

Since the numbers I get from different tools are so different, I’m going to ignore the hard number. Especially since inflation changes the picture. Is that $2 million in today’s dollars or $2 million in 2039 dollars?

Instead, my goal will be to save a minimum of 10% of our income every year. That way, our savings automatically increases as our income increases. In years we can save more or get nice bonuses (we both have good opportunities for that), we’ll do so.

As our income grows, we may even be able to increase that number to 15%. Or maybe we’ll have employers who match our 401K investments (they currently don’t.)

A hard number, especially one like $5 million is scary. With all the variables and potential changes to Social Security, tax laws, etc., I’d rather focus on a percentage I can control than a fixed number that loses meaning with each passing day.

Do you target a hard number or focus on a percentage? What’s your retirement strategy?

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