How Much You Need to Save

Your expenses in retirement will not necessarily decline. Commuting costs get replaced by healthcare costs. Social expenses replace work-related ones. You will need as much money in retirement as you need today – likely even more, due to inflation. Do not assume you will be able to live on less.

Saving 15% of your pay in a properly diversified portfolio gives you a reasonable chance of accumulating enough by retirement age to quit working and still maintain your lifestyle. That figure accounts for Social Security income – which will provide less than most people expect – and assumes a long retirement.

If you need $150,000 a year in retirement and want to sustain that for four decades, a 7.5% annual withdrawal rate is not sustainable. And because of inflation, in 20 to 25 years you might need $300,000 to equal the purchasing power of $150,000 today. These are not reasons to despair – they are reasons to plan carefully and start early.

It is also worth noting that unrealistic expectations about timing are common. A major survey found that 21% of workers plan to retire at age 70 or later, yet only 5% actually do. Health problems forced 40% to retire early; another 18% stopped working to care for a family member. Most people retire sooner than they expect. The earlier you build your savings, the more flexibility you will have.