It’s the big question many people ask when they’re ready to quit the rat race and retire: Have I saved enough money for retirement?
For most people, enough means being able to enjoy your nonworking years without having to scrimp and save. Sure, it’s important to watch costs, especially in an era of high inflation, but how do you know whether your net worth is adequate for a comfortable retirement?
A 2024 Northwestern Mutual study published in April revealed that Americans think the “magic number” needed for a comfortable retirement is $1.46 million. That’s a 15% increase over the $1.27 million reported last year, far outpacing today’s inflation rate, which hovers between 2% and 3%.
Those magic number estimates differ by generation, with older Americans estimating a much lower amount needed for retirement than Generation X, millennials and Generation Z.
| Generation | Amount Wanted for Comfortable Retirement |
| All | $1.46 million |
| Generation Z | $1.63 million |
| Millennials | $1.65 million |
| Generation X | $1.56 million |
| Baby boomers and older | $990,000 |
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Don’t Overlook Spending and Life Expectancy
Recurring spending is the most important factor pre-retirees should consider, said Doug Carey, a chartered financial analyst at financial planning technology company WealthTrace in Zionsville, Indiana, in an email.
“Many people are shocked to see how much an extra $10,000 in spending impacts their likelihood of running out of money in retirement,” Carey said. “This is why it is so important to have an accurate budget so you can input this spending number into your retirement plan.”
Life expectancy is another key factor that many pre-retirees overlook. “Too many people will put in a life expectancy number that is too low, such as age 78 for many men and women,” said Carey, who recommends that people don’t underestimate the odds of living to age 90.
Magic Number: How Much You’ll Need to Retire Comfortably
Although Northwestern Mutual’s survey points to an average amount Americans think would make them feel comfortable in retirement, no two situations are the same. The amount you need may not be the same as your neighbor’s.
“Retirement looks different for everyone. For example, Americans say they need an average annual salary of $248,167 to feel happy, according to our research,” said Keith Jones, a certified financial planner and senior financial advisor at retirement services company Empower in Denver.
“It boils down to personal financial goals and how much you plan to spend in retirement versus how much net worth you have accumulated over your lifetime,” Jones said. For example, a couple who envisions a simple life of staying close to home and spending time with family and friends will probably need less than a couple that wants to travel the world.
Factors such as geography and sources of retirement income also matter.
“Someone who retires and owns a home in San Diego or New York City may have a net worth north of $2 million or more, but much of that isn’t accessible,” said Clint McCalla, a senior client advisor at Meira, a financial planning and investment firm based in Coral Gables, Florida, in an email.
“If that same person has a generous pension covering all of their core and discretionary expense needs each year, they probably feel pretty wealthy, even though the value of that pension doesn’t necessarily show up in their net worth,” McCalla said.
[Read: What Is a Good Monthly Retirement Income?]
How to Determine Your Retirement Needs
Guessing isn’t a good approach for figuring out how much you’ll need. A better approach is to develop a realistic estimate of your future spending needs. Ignore any outdated advice about spending that decreases in retirement. That’s especially true in an era of high inflation.
The first step in determining your retirement needs is to assess your current income and lifestyle, and then adjust for inflation, said Kelly Gilbert, principal fiduciary advisor at EFG Financial in Grand Rapids, Michigan, in an email.
“For many, this is as easy as subtracting how much you save each year from your gross pay,” Gilbert said. “The result is how much you are spending today. Then add 3% inflation for each year between now and your retirement start date.”
That will give you an adjusted inflation target, but Gilbert urges caution.
“When you retire, your health care costs are now a bill instead of an employee benefit. This can add $6,000 per person, per year to your bills that you should account for,” he said.
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Ways to Monitor Your Net Worth
Monitoring your assets throughout retirement is crucial to avoid overspending.
Fortunately, numerous cloud-based financial planning and budgeting tools and financial apps can help. Getting professional help is often advisable, as a planner will often identify long-term expenses you may not have considered.
“If you’d like to track it on your own, you should create a spreadsheet that allows you to monitor the growth from year to year,” said Gerald Grant III, a certified financial planner at Equitable Advisors in Miami, in an email.
Grant recommends a methodical approach to evaluating account value.
“Because the values can fluctuate throughout the year, you should focus on picking a specific point in time where you take the values from point to point,” he said. “For example, every Dec. 31.”
[READ: 10 Essential Sources of Retirement Income]
How to Carefully Spend Your Net Worth in Retirement
If the market had a poor year and your net worth is less than you anticipated, you may have to adjust your spending.
However, a net worth that’s tied up in illiquid assets such as real estate isn’t readily available for immediate spending needs.
“In retirement, net worth takes a back seat to income, but income does come from assets,” Gilbert said.
For example, he said, a rental property may create income that is vital in retirement, but that income will not show up on a net worth statement.
“The equity will, but not the all-important income,” he added.
Gilbert recommends a four-step approach when planning retirement.
“First, calculate your annual spending target and make sure it is adjusted for inflation each year. Second, subtract your total income from the spending target. Incomes can include pensions and Social Security,” he said.
Thirdly, Gilbert recommends using the difference as the amount to withdraw from savings each year to make ends meet.
“Fourth, if your annual withdrawal is more than 4% of your total savings account balances, then you should look at lowering spending or increasing incomes,” he said.
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What Net Worth Do You Need to Retire? originally appeared on usnews.com
Update 05/17/24: This story was previously published at an earlier date and has been updated with new information.
