Will Your Retirement Income Be Enough? (2024)

How much will you need to retire and will it be enough? A survey from Schwab Retirement Plan Services found the average 401(k) participant thinks they'll need $1.7 million to retire. Roughly half of those surveyed believed that they could meet their retirement goals.

But many people in the U.S. aren't investing enough to reach that savings goal and the income it brings. You have to start by estimating your retirement expenses to find out if your retirement income will be enough.

Retirement Expenses

There are various formulas to estimate retirement expenses, all of which are rough guesses at best. One well-known method is the 80% rule. This rule of thumb suggests that you'll have to ensure you have 80% of your pre-retirement income per year in retirement. This percentage is based on the fact that some major expenses drop after you retire, like commuting and retirement-plan contributions. Of course, other expenses may go up such as vacation travel and, inevitably, health care.

Many retirees report that their expenses in the first few years not only equal but sometimes exceed what they spent while they were working. One reason for this is that retirees may have more time to go out and spend money.

It's common for retirees' expenses to go through three distinct phases:

1. Higher spending early on
2. Modest spending for a long period after that
3. Higher spending near the end of life due to medical or long-term care expenses

Standard of Living

Of course, future expenses are hard to predict. But the closer you are to retirement, the better idea you probably have of how much money you'll need to sustain your current standard of living or to support a different one.

Subtract any expenses that you expect will go away after you retire and add in any new ones if you use that as a base. This will at least give you a ballpark figure to work with.

If you anticipate any big bills (a lot more travel, a brand new kitchen), count those in, too. The same goes for any major cost-savers, such as if you plan to downsize and move to a less expensive home.

How Much Do I Need to Retire?

Many financial advisors boil this answer down to another rule of thumb, at least as a starting point: the 4% sustainable withdrawal rate.

This is the amount you can theoretically withdraw through thick and thin and still expect your portfolio to last at least 30 years. Not every expert agrees that a 4% withdrawal rate is optimal, but most would argue you should try not to exceed it.

Here's how much you could withdraw annually from three nest eggs if you stick to the 4% rule:

• $500,000: $20,000 a year
• $1 million: $40,000 a year
• $2 million: $80,000 a year

Take your estimated monthly expenses (be sure they're realistic) and divide that number by 4% to figure out how much income you'll need in retirement. You'll need $1.25 million ($50,000 ÷ 0.04) going into retirement if you estimate that you'll need $50,000 a year to live comfortably.

Retirement Income

Now that you have some notion of your retirement expenses, the next step is to see whether your income will be enough to cover them. Add up how much income you expect to receive from three key sources:

• Social Security retirement benefits
• Defined-benefit pension plans
• Retirement savings

Social Security Retirement

You can get a projection of your Social Security retirement benefits by using the Social Security Retirement Estimator if you've been working and paying into the Social Security system for at least 10 years and you've earned 40 credits. The closer you are to retirement, the more accurate the estimate is likely to be.

Remember that you'll receive less each month the earlier you take benefits. You can opt to take benefits as early as age 62 or as late as age 70, after which time there's no further incentive for waiting because you'll receive the full amount whether it's at age 70 or later.

The average Social Security retirement benefit was $1,706.98 a month in September 2023. The most you can receive depends on your age when you begin collecting benefits.

The maximum monthly benefits for 2024 are as follows:

• $4,873 if you file at age 70
• $3,652 at age 66
• $2,710 at age 62

Defined Benefit Plans

The plan's benefits administrator can give you an estimate of how much you'll get when the day comes if you have a pension coming to you from your current employer or a former one.

You'll want to consider your potential income under different scenarios if you have a spouse, such as taking benefits in the form of a joint and survivor annuity which would continue to provide a specified percentage of your benefits to your spouse if you die first.

Retirement Savings

Retirement savings include everything you've stashed in your 401(k)s, IRAs, health savings accounts (HSAs), and other accounts you have earmarked for retirement.

You must begin taking required minimum distributions (RMDs) at age 73 (up from 72 in 2022) if you have a traditional IRA or 401(k) and you reached age 72 after Dec. 31, 2022. Note that Roth IRAs have no RMD requirements during your lifetime although Roth 401(k)s do. Those RMDs will determine the monthly income you'll receive from those accounts when you hit age 73. But you can start taking money out of an IRA or 401(k) as early as age 59½ without a penalty.

Your Personal Bottom Line

You probably have enough for retirement if your total retirement income exceeds your predicted expenses when you add it up. But, of course, it wouldn't hurt to have more.

You may have to make some adjustments and find ways to increase your income, lower your expenses, or both if it looks like you're going to fall short. You could:

• Work a few more years, if that's an option
• Boost the portion of your pay that you set aside for retirement
• Adopt a more aggressive investment strategy
• Cut back on unnecessary spending
• Downsize to a smaller, more affordable home

The sooner you do the math, the more time you'll have to make the numbers work in your favor.

Saving vs. Investing

Saving often results in lower returns and retirement account balances than investing. People generally save money to buy things and for emergencies. The money is there when you need it and it has a low risk of losing value but that comes with small potential gains.

Investing is done with long-term goals in mind. You can potentially have better long-term returns but with more risk. The key is to find the balance between risk and reward based on your risk tolerance and time horizon.

Savings Rates: What's Enough?

Having a dollar amount as your long-term savings goal is good but it's helpful to focus on how much you should sock away each year.

About 10% to 15% is the historical recommended savings rate. Fidelity further refines that to say that you can retire comfortably with a 15% savings rate if you start in your mid-20s. Here's how a few scenarios could play out for a future retiree.

5% Retirement Savings Rate

Let’s assume that a 30-year-old makes $40,000 a year and expects 3.8% raises annually until retirement at age 67. They expect a return of 6% annually on their retirement contributions with a diversified portfolio of stock and bond mutual funds.

This individual will have saved $166,770 by age 67 with a 5% contribution rate throughout their working life. But their 5% retirement savings (with pay increases and 6% investment return) are significantly short of the mark if they want 85% of their pre-retirement income to live on and also receive Social Security.

They need $1.95 million saved by age 67 to match 85% of their $153,167 pre-retirement income in retirement and meet their goals. Unfortunately, a 5% savings rate doesn't place their savings at even 10% of the funds they'll need. A 5% retirement savings rate isn’t enough.

10% and 15% Savings Rates

Keeping with the above assumptions about salary and expectations, a 10% savings rate yields this individual $313,142 at age 67. Their projected needs remain the same at $1.95 million. So even at a 10% savings rate, they miss the amount of their preferred savings.

They won't reach the $1.95 million amount even if they pump up their savings rate to 15%. Adding in their anticipated Social Security of $3,808 per month (totaling $665,440 for 15 years), their retirement savings would be $1.2 million, about $750,000 short.

Does this mean that individuals who don’t save 15% or more of their income will be doomed to a sub-standard retirement? Not necessarily. The key is increasing your contribution as your income increases. You can increase the chances of meeting your retirement goals if you live conservatively and increase your contributions to your retirement plan and investment principal as your income rises over time.

Conservative Assumptions

As with any future projection scenario, we’ve made some assumptions. Investment returns could be higher than 6% annually. This person might live in an area with a low cost of living where housing, taxes, and living expenses are below the U.S. average. They might need less than 85% of their pre-retirement income or they may choose to work until age 70. Their salary might grow faster or slower than 3.8% annually.

All of these optimistic possibilities would net a larger retirement fund and lower living expenses in retirement. Consequently, they could save less than 15% and have a sufficient nest egg for retirement in a best case scenario.

What if the initial assumptions are too optimistic? A more pessimistic scenario includes the possibility that Social Security payments might be lower than they are now or that they may not continue on the same positive financial trajectory.

Or this person might live in Chicago, Los Angeles, New York, or another high-cost-of-living region where expenses are much higher than in the rest of the country. Even the 15% savings rate might be insufficient for a comfortable retirement with these gloomier hypotheses.

Measuring Your Needs

It's important to plan for extra savings or income streams from now on to make up for the shortfall if you've reached mid-career without saving as much as these numbers say you should have put aside,

You could plan to retire somewhere with a lower cost of living to make your money last longer. You can also plan to work longer, which will augment your Social Security benefits and earnings. And remember, your Social Security benefit will be higher if you wait until your full retirement age to collect. It will be even higher if you delay until age 70.

There are guidelines to help you set one if you're looking for a single number to be your retirement nest egg goal. Some advisorsrecommend saving 12 times your annual salary. A 66-year-old$100,000-per-year earner would need $1.2 million at retirement under this rule.But, as the former examples suggest and given that the future is unknowable, there's no perfect retirement savings percentage or target number.

The Bottom Line

Planning for retirement is not something you want to do shortly before you stop working. It's a lifelong process. Your planning will undergo a series of stages throughout your working years. You'll evaluate your progress and targets and make decisions to ensure you reach them.

A successful retirement depends not only on your ability to save and invest wisely but also on your ability to plan. How much income you'll need in retirement is hard to know and tricky to plan, but one thing's for certain. It's far better to be over prepared than to wing it.