About 10 minutes
 
 
In the world of personal finance, planning for retirement tends to get a lot of attention. And for good reason. For most of us, saving up for retirement will represent our largest financial goal in terms of how much we need to save. So the sooner you get started the better. So let’s get to it!
 

Here’s what we cover in this guide

Planning ahead
How much money to retire
Understanding your withdrawal rate
Number of years until retirement
Your current savings
How much income you contribute
Your income growth rate
How your investments grow
Other sources of income
Dealing with estimates
 

Planning ahead

Alright, we know retirement might seem like a long way off to many of you. But planning for retirement is probably the single most important financial goal any of us will face. Because some day you will have to retire, and when that time comes, you want to make sure your financial future is secure. If you start early and set reasonable goals, you’ll make the process much less daunting.
 
And if retirement doesn’t seem all that far off, that’s okay too. You may just need to be a bit more aggressive with your saving and planning.
 
We’ve designed this guide to accompany our retirement calculator to walk you through how it works and help you crunch some actual numbers.
 
But please keep in mind, with any long-term financial planning, we’re always dealing with estimates – our financial futures can’t be known with complete certainty. So spend some time trying out different assumptions and see how the numbers in the calculator change.
 
That said, it’s time to dig in to some details.
 

How much money will you need to retire?

This question is at the core of virtually any retirement plan. And as you can probably guess, there’s no single “right” answer that will work for everyone.
 
So to estimate out how much you’ll need, it’s helpful think in terms of two key numbers;
 
1. Your replacement income
 
2. Your withdrawal rate
 
Your replacement income represents how much money you plan to take out each year for living expenses. Obviously the more you plan on spending in retirement, the higher your required replacement income, and the more you’ll have to save up.
 
Your withdrawal rate represents what percentage of your retirement savings you’re comfortable dipping into each year to get to your replacement income.
 
These two numbers combined will give a rough idea of how much you’ll need to save.
 
How it works: For example, let’s say you want to have a replacement income of $50,000 per year, and are comfortable with a withdrawal rate of 4%. That means you would need to save up about $1,250,000 (4% of 1,250,000 is 50,000).
 

So what’s the right withdrawal rate?

Once again, there’s no exact answer that works for everyone here.
 
But a common rule of thumb is that you can plan on withdrawing somewhere between 2% and 4% of your savings in the first year of retirement (and increase that dollar amount by inflation each year) and can then safely expect your money to last throughout retirement.
 
Note the specific wording – the withdrawal rate is the percentage you take out in your first year of retirement, which is not exactly the same as taking out that percentage every year of retirement. Most retirement calculators work in a similar way.
 
In other words, this says you would need to save up about 25 to 50 times your replacement income to retire.
 
Keep in mind, this is just an approximation for the “average” retiree and your specific situation may be different. Other factors should be considered too, like how long you’ll need the money to last, your investment risk tolerance, whether you want to have money left over for loved ones, and your ability to adjust your annual spending if necessary, just to name a few.
 
Basically, the less you plan on taking out each year, the longer you can expect your money to last. But obviously this would also mean spending less in retirement, or saving more for retirement in advance. The key is to find the right balance that works for you. When you use our calculator, try out a few withdrawal rates to see how your spending in retirement would change.
 

Note on Inflation: You’ll also need to account for inflation, since a dollar in thirty years will likely be worth a lot less than a dollar today. Our calculator automatically adjusts for inflation. So the numbers it calculates are in today’s dollars, which you can compare to your current earnings and spending. We assume an annual inflation rate of 3% in our calculation.

How to get there

Once you figure out how much you’ll need to save (or at least have a rough estimate), you’ll then need to figure out what it takes to get there. There are a few key factors that come into play, which correspond to the inputs in our calculator. So let’s go over them.
 

1. Number of years until retirement

It probably seems obvious, but the more years you have until retirement, the less you need to save each year. So it pays to start early. Also, the earlier you start, the more you’ll benefit from interest compounding as your investments will have more years to grow. And this can make a big difference over time.
 
For our base assumption in the calculator, we assume a retirement age of 65 as a default. But feel free to adjust that based on your goals. Of course if you have dreams of an early retirement, you’ll have to plan ahead and likely save more aggressively.
 

2. Your current savings

We aren’t all starting off at the same point here. Some of you may already have a sizable nest egg, and some of you don’t, and that’s okay. But it’s important to take into account where you stand today as you plan for the future.
 
Add up all of your assets (checking accounts, savings accounts, investment accounts). Then subtract off all your debts to get your current financial net worth.
 
If you have a lot of debt, your net worth might actually be negative, meaning your liabilities exceed your assets. As you save more and pay down your debt, your net worth with grow.
 
You can include your home if you want. But realize it can only be converted into retirement income if you plan on selling it, which means you would need to find a new place to live.
 

3. How much of your income you contribute

Your income and savings rate (the percentage of your income you save each year) will directly impact how much money you’ll have saved by retirement. Of course the more you save each year, the faster your retirement savings will grow.
 
And while increasing your contribution rate might not seem like much fun now, your future self will thank you. We generally recommend trying to save 20% of your after-tax pay for financial priorities, like retirement. We cover this more in Saving Strategy.
 

4. How your income grows

Hopefully your income will be growing over time, which means if you continue saving the same percentage, the amount you contribute each year will automatically grow too.
 
But this doesn’t mean you should put off saving money now just because you think you’ll earn more later. After all, you never know what the future holds. Push yourself to save and start early.
 
Our calculator allows you to input your expected annual increase in income.
 

5. How your investments grow over time

The return you earn on your investments will also be an important factor.
 
As we mention in Investing Returns, since 1928, stocks have historically earned about 9.5% a year and bonds about 5% a year. So a portfolio that has some of each, would be expected to earn somewhere in between. But keep in mind, future returns are always uncertain to some extent, and there’s no guarantee they’ll be the same as past returns. However, for long-term planning purposes, it can at least be a good starting point as you get your bearings.
 
So based on history, you could try assuming investment returns between 4% and 9% per year.
 
If you’re more aggressive with your investment allocation (meaning you have a heavier weight towards stocks), then you might earn a return towards the higher end of the range. If you’re more conservative with your portfolio (a heavier weight towards bonds), then you’d want to assume something lower.
 
When you’re using the calculator, try out a few different returns and see how your retirement estimate changes.
 
We should also point out that the numbers we just referenced are nominal return numbers (i.e. they haven’t been adjusted for inflation). In our calculator, we adjust the final savings amount to account for inflation. So the estimated retirement savings number it gives you is in today’s dollars and you can compare it to your current spending.
 
In our calculator, we also make a simplifying assumption that your investment return is constant year after year. In reality, your returns will vary from one year to the next, and the path your returns take can impact how much money you end up with at retirement.
 

Also consider other sources of future income

You’ll also want to consider any additional sources of income coming your way in retirement, like Social Security, the potential sale of real estate, and any inheritance you might receive.
 
Today, many retirees rely on Social Security for retirement income. But there’s technically no guarantee it will exist when you’re ready to retire or how much you’ll receive each year. So planning to rely on it entirely is generally not recommended. Also, the payments probably won’t cover all of your needs anyway. Long story short, yes, a lot of us will get some amount of Social Security, but the less you plan on relying on it, the more confident you can be about your financial stability in retirement.
 
Other sources of income might be available too, like selling your home and moving to a smaller one. But they sometimes require lifestyle changes you might not be ready to make. Try to think about what changes you can handle as you consider future sources of retirement income.
 

And remember, we’re talking about estimates here

It’s important to keep in mind that when you’re planning your financial future, you’re dealing with estimates, and estimates are inherently uncertain.
 
Sometimes we earn less than we expect, our investments generate lower returns than we planned, or we face unexpected expenses. For these reasons and more, it’s a good idea to err on the side of caution and build in a buffer for the amount you think you’ll need to save. That way, even if you fall short of your goal, you’ll still be financially secure.
 
 

Key Take-Aways

1) Saving for retirement will likely be your most substantial financial goal, so it’s important to get started early to benefit from interest compounding.

2) As you plan for retirement, you’ll want to figure out how much income you’ll need to live on and use that to determine how much money you’ll need to have saved up to retire comfortably.

3) Your retirement savings will growing based on several important variables, including; your current net worth, how much you save each year, how your income will grow in the future, and what return your investments earn.

4) Your investment return will depend on what investments you hold in your portfolio. In general, investments with more market risk, like stocks, will tend to earn a higher return over time.

5) Planning your finances many years in advance comes with a given amount of uncertainty. You don’t know exactly what the future will bring, so generally it’s good to build in some margin for error.