How Much Should You Save for Retirement? Discover Your Magic Number

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

Retirement may feel far off, or it might be just around the corner, but figuring out how much you need to save is a question everyone asks at some point. Your “magic number” isn’t one-size-fits-all—it’s unique to you, your lifestyle, and your future goals. Let’s break it down in a way that’s easy to understand, so you can feel confident you're heading in the right direction.

What’s Your Magic Number?

Think of your magic number as the amount you need to retire comfortably. It’s personal—shaped by your lifestyle, spending habits, and any other income sources like Social Security or pensions.

Take Sarah, for hypothetical example: she dreams of traveling the world during her retirement. Her savings goal is going to look a lot different from John’s, who plans to live a quiet life in a small town with fewer expenses. This shows why it’s important to tailor your plan to your lifestyle and goals.

What Factors Shape Your Magic Number?

Let’s take a closer look at the key things that determine your magic number:

• When You Start Saving: The earlier you begin, the more time your money has to grow. If you start at 25, even small contributions benefit from compound interest over the years. But if you’re starting at 45, you might need to save more aggressively to make up for lost time.
• Your Lifestyle Goals: Are you planning to travel frequently or live more modestly? The lifestyle you want in retirement will directly impact how much you need to save.
• Other Income Sources: If you’ll be receiving income from sources like Social Security, pensions, or rental properties, this can reduce the amount you need to save from your own investments. For example, the average monthly Social Security benefit in 2024 is around $1,907, which can help cover your expenses and reduce the amount you need to withdraw from your savings. With this additional income, you can adjust your savings strategy to better fit your needs​​.

Steps to Calculate Your Retirement Needs

Ready to calculate your magic number? Here’s how you do it:

1. Estimate Your Future Expenses:

• List your current monthly expenses, such as housing, utilities, food, transportation, and healthcare.
• Consider potential changes after retirement. For example, you may no longer be paying for work-related expenses, but healthcare might increase.
• Inflation Adjustment: Multiply your estimated monthly expenses by an annual inflation rate (commonly 2-3%). You can use the following formula:

Future Value (FV) =(PV) * (1 +r)n

Where:

• PV = Present Value
• r = Interest Rate (%)
• n = number of compounding periods

2. Subtract Expected Income: 

• Calculate the annual income you'll receive from Social Security, pensions, or other sources. For example, if Social Security provides $1,907 per month, your annual income from Social Security would be:

Annual Social Security Income = $1,907 × 12 = $22,884

• Subtract this from your estimated retirement expenses to determine the amount you'll need to withdraw from your savings each year.

Gap to Fill = Annual Retirement Expenses - Annual Income (Social Security + Pensions)

3. Use the 4% Rule: 

• The 4% Rule suggests withdrawing 4% of your retirement savings annually. To determine how much you need saved by retirement, use this formula:

Savings Needed = (Gap to Fill) ÷ 0.04

For example:

If your estimated gap is $40,000 per year, the calculation would be:

Savings Needed = $40,000 ÷ 0.04 = $1,000,000

Hypothetical Example:

• Future Monthly Expenses: $4,000 (adjusted for inflation)
• Annual Expenses: $4,000 × 12 = $48,000
• Social Security: $1,900 per month or $22,800 annually
• Gap: $48,000 - $22,800 = $25,200
• Savings Needed: $25,200 ÷ 0.04 = $630,000

By following these steps, you can estimate how much you need to save to retire comfortably. Here is an online calculator to make your calculations easier.

Effective Strategies to Reach Your Magic Number

Now that you know your target, how do you get there? Let’s talk strategy:

• Automate Your Savings: Set up automatic contributions to your retirement account. Even small amounts add up over time, especially if you start early. It’s one of the easiest ways to ensure you’re saving consistently.
• Diversify Your Investments: Don’t put all your eggs in one basket. Diversify across stocks, bonds, and real estate to balance risk and returns.
• Adjust as You Go: Life changes—whether it’s a new job, kids, or a career switch, revisit your plan regularly to make sure your savings goals still make sense.

Building a Flexible Retirement Plan

Planning for retirement isn’t about having one perfect strategy—it’s about being flexible and adjusting as your life changes. By saving smartly, investing wisely, and regularly reviewing your plan, you’ll be in great shape to reach your magic number and enjoy the retirement you’ve always dreamed of.