There are so many variables in retirement planning that figuring out how much you actually need to save can be a real challenge. It's totally normal to want to simplify the process by falling back on well-known retirement "rules," but this could end up hurting you in the long run. If you want to retire comfortably, you're better off ignoring these common retirement standards from years past.
1. You need 70% of your preretirement income to live on
While it's true that annual expenses often decrease once you enter retirement, this isn't the case for everyone. And even among those who see their monthly bills shrink, there isn't a consistent rate for such decreases. You might end up spending about the same amount in retirement each year or maybe even a little more, depending on what you plan to do with your newfound free time.
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Rather than trying to guess what percentage of your current income you might need in retirement, you should focus on your estimated retirement expenses. You can use your current bills as a baseline, but don't forget to account for inflation and shifting spending patterns. Some of your current expenses, like child care, might decrease or disappear, while others, like healthcare, might rise over time.
Once you have an estimate of your annual retirement spending, you can begin to work out how much you need overall by multiplying your annual spending by the number of years you expect to spend in retirement, figuring in an extra 3% per year for inflation. And if your plans for retirement change over time, you can always redo your calculations.
2. You should save $1 million for a comfortable retirement
A $1 million nest egg was once considered enough for a comfortable retirement, but several factors make this untrue today. Inflation has driven up living costs, so $1 million doesn't go as far as it used to. People are also living longer, and retirement can last 30 or more years for some. These people will need more money to cover more years of living expenses.
Many workers today believe they'll need about $1.9 million to retire comfortably, according to a Schwab survey. That's quite a step up from $1 million. But not everyone will need this much, and you may not have to do it all alone. If you're married, your partner may be able to help you save. And you might also be able to count on some money from Social Security, a 401(k) match, or a pension.
Once again, you're better off thinking about your actual retirement expenses than choosing an arbitrary dollar amount as your savings goal. This will enable you to tailor your retirement strategy to your personal goals.
3. You should follow the 4% rule when withdrawing your retirement savings
The 4% rule says that in your first year of retirement, you can withdraw up to 4% of your retirement savings. Then you adjust this amount every year thereafter to account for inflation. This strategy is supposed to help your retirement savings last 30 years, but it doesn't always work out that way.
Some conservative retirees choose to follow the 3% rule instead. This is the same as the 4% rule, except you limit yourself to 3% of your savings in your first year. Others choose to adopt a custom withdrawal strategy based on their retirement goals.
Those who plan to travel or make big-ticket purchases in retirement will likely want to create a custom plan, because the 4% rule and its derivatives don't allow for extra spending in any given year.
It's your retirement, so you're the one who ultimately gets to decide how you want to spend it and how you save for it. But try to resist the temptation to take shortcuts when planning your retirement budget. The time it'll save you today isn't worth the headaches it'll create later.
FAQs
What is the 3% rule in retirement? The 3% rule in retirement says you can withdraw 3% of your retirement savings a year and avoid running out of money.
What is the rule of 3 in retirement? ›
What is the 3% rule in retirement? The 3% rule in retirement says you can withdraw 3% of your retirement savings a year and avoid running out of money.
What is the 4 rule for retirement withdrawals? ›
The 4% rule aims to minimize the risk of failure (running out of money) by being very conservative with spending early in retirement. However, this comes at the cost of potentially underutilizing one's savings and not being able to spend more if investment returns are favorable.
What is the 95% rule retirement? ›
Under the Rule of 95, members can retire when their age plus their years of service equal 95 provided that they are at least 62 years old. For example, a member who is 62 years old could retire with 33 years of service rather than waiting until their schedule-based eligibility date (62 + 33 = 95).
What is the golden rule for retirement? ›
Retirement may seem like a distant dream, but it's never too early or too late to start planning. The “golden rule” suggests saving at least 15% of your pre-tax income, but with each individual's financial situation being unique, how can you be sure you're on the right track?
What is the high 3 retirement regulation? ›
High-3: If you entered active or reserve military service after September 7, 1980, your retired pay base is the average of the highest 36 months of basic pay. If you served less than three years, your base will be the average monthly active duty basic pay during your period of service.
What is the 3 bucket retirement plan? ›
The buckets are divided based on when you'll need the money: short-term, medium-term, and long-term. The short-term bucket has easily accessible money, the medium-term bucket has money in things that generate income, and the long-term bucket has money in things that grow over time.
What percentage of retirees have $2 million dollars? ›
According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.
What is the $1000 a month rule for retirement? ›
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
How long will $400,000 last in retirement? ›
Safe Withdrawal Rate
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
“This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions.”
What is the 80 20 retirement rule? ›
What is an 80/20 Retirement Plan? An 80/20 retirement plan is a type of retirement plan where you split your retirement savings/ investment in a ratio of 80 to 20 percent, with 80% accounting for low-risk investments and 20% accounting for high-growth stocks.
What is the golden rule for pensions? ›
With the golden rule, the ratio between your coordinated wage and the projected old-age pension at the time of ordinary retirement always remains the same, regardless of whether the rates are 1% or 2%. The golden rule is essential for calculating the appropriateness of pension plans.
What is a good monthly retirement income? ›
Many retirees fall far short of that amount, but their savings may be supplemented with other forms of income. According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
What is the retirement rule of 3? ›
In some cases, it can decline for months or even years. As a result, some retirees like to use a 3 percent rule instead to reduce their risk further. A 3 percent withdrawal rate works better with larger portfolios. For instance, using the above numbers, a 3 percent rule would mean withdrawing just $22,500 per year.
Why the 4 rule no longer works for retirees? ›
Withdrawing 4% or less of retirement savings each year has long been a popular rule of thumb for retirees. However, due to high inflation and market volatility, the rule is less reliable now. Retirees will need to decrease their spending and withdrawal rate to 3.3% so they don't run out of money.
How does the 3% rule work? ›
Follow the 3% Rule for an Average Retirement
If you are fairly confident you won't run out of money, begin by withdrawing 3% of your portfolio annually. Adjust based on inflation but keep an eye on the market, as well.
What is the correct sequence of 3 phases of retirement? ›
Retirement planning has three stages – the accumulation phase, the planning phase and the distribution phase.
What does 3 at 60 mean for retirement? ›
• The retirement formula computed at age 60 = 3% x years of service x final. compensation. For retirement earlier than age 60, the percentage is reduced by each quarter year of age to a minimum of 2% at age 50. Employees are eligible to retire at age 50 with five years of service credit.
What does it mean to retire at 3%? ›
Thus, the "3%" works as a multiplier. The salary percentage employees receive after retirement is equal to 3 times the number of years they have worked.
