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Whether your retirement is coming soon or you have several decades to go, how much you need to save can be overwhelming. Considering the potential need, over $1 million feels like a big number, and it is.
However, it can be helpful to reframe the scenario, so focus on the kind of lifestyle you want in retirement. For example, a modest lifestyle of $50,000 allows you to enjoy life without skimping on everything. Here’s how much you need to save to live on a $50K annual budget.
What does a $50,000 retirement lifestyle look like?
A $50,000 lifestyle is not the same as your working salary. Instead, the $50,000 is what you spend and live on. Several factors can directly affect how far that $50,000 will go each year, most notably the cost of living and whether you still have a mortgage.
Living somewhere more affordable and having no mortgage can stretch your budget, giving you more freedom to do fun things like travel. It’s also important to remember that $50,000 is in today’s dollars. Inflation will require higher dollar figures in future years. Don’t ignore health care costs, either. Fidelity estimates that retirees will spend hundreds of thousands of dollars on health care during retirement.
How big of a nest egg do you need for a $50,000 lifestyle in retirement?
Using the 4% rule is a helpful way to determine how much retirement savings you need to maintain a $50,000 lifestyle. According to Schwab, a 4% safe withdrawal rate means you withdraw 4% of your total portfolio in the first year of retirement and adjusts it annually for inflation.
If you follow the rule, you’ll need at least $1.25 million in retirement savings. These funds should be in a diversified portfolio, assuming you will live 25 to 30 years in retirement. For more conservative people, you can use a 3.5% withdrawal rate, which would require up to $1.5 million in retirement savings.
No matter what you choose, it’s not a guarantee. Returns, inflation and longevity all impact the number. Talking to a trusted financial advisor can help you plan.
Does Social Security affect your goals?
For retirees unable to accumulate $1 million or more in retirement savings, it’s important not to overlook Social Security. Monthly payments can help cover some of your needs in retirement.
If you assume you will receive $20,000 annually from Social Security, that means you only need to cover $30,000 annually from your savings. Using the 4% rule reduces the $1.25 million portfolio requirement to $750,000.
Keep in mind, however, that Social Security benefits could be reduced in the future if the funding shortfall is not addressed. Consulting with a financial advisor can help you determine what role Social Security plays in your planning needs.
Factors that can increase or decrease your numbers
Retirement life is not a one-size-fits-all approach. Each person’s situation is unique, which can impact how much you need to save. For example, working longer hours reduces the number of years you have to save and can increase Social Security payments.
Debt and housing can also directly affect expenses in retirement. Eliminating high-interest debt and downsizing can significantly reduce your expenses, leaving more resources available for retirement life. Being flexible about where you live and avoiding debt can directly impact how much you need to save.
Retirement is a time to enjoy life. With smart planning, a $50,000 lifestyle in retirement is possible. Pulling certain levers in your planning can free up more of that money to do what you want in retirement.