Do you know how much money you need to retire? This question is a key part to retirement planning and varies from individual to individual based on income levels and the lifestyle desired during retirement. Unfortunately, it is also a question that the majority of Americans cannot answer with much confidence.

So why is it so hard for people to calculate just how much money they will need to retire? For one, it’s complicated. The amount of money you will need directly correlates to how long you will live in retirement and that could be one decade, or it could be five. Then there is the question of living expenses, inflation, lifestyle, etc. etc. etc…. you get the point. The good thing, however, is that there are some tried and true methods to help you determine exactly how much money you will need to retire.

**Assume you need 10x your annual salary**

One of the most simple methods of determining how much money you will need in retirement is to plan on accumulating 10 times what your final salary will be. To calculate your final salary you simply take what you are making now and assume an annual inflation percentage increase from now until the time you plan to retire and multiply the final number by 10.

For example, assume that you are 55 making $100,000 a year, plan on retiring in 10 years, and your inflation estimation is 2% a year. That would mean that at the time you retire your final salary would be $119,509 a year and that you should plan on having $1,195,090 saved up.

**Set a percentage of your pre-retirement income and work to achieve**

If you are still a few decades away from retirement, or just want to do some back of the napkin math you can also make an assumption about what your salary will be when you are close to retirement and take a certain percentage of that salary as an estimate of living expenses.

Most financial planners will use somewhere in the range of 70% to 80% of your pre-retirement salary as a good proxy to maintain your current standards of living. If you are someone what plans to travel quite a bit in retirement you may want to bump that percentage up a bit though which will mean more saving.

To use this approach you first need to make an assumption about your pre-retirement salary, which can be somewhat difficult if you are a ways off given the potential for promotions, etc. In general however, to calculate your pre-retirement salary you should take your current salary and assume a 2% raise every year from now until retirement like we did above.

In the example above, we assumed that you were 55 making $100,000 a year, that you planned to retire in 10 years, and that inflation and raises were 2% a year. That left you with a final pre-retirement salary of $119,509 a year. Assuming that you will be an average spender in retirement and would like to maintain your current standard of living you should then assume you will need 70% to 80% of that $119,509, or $83,655 to $95,606 each year in retirement.

**Set a fixed budget and work to achieve**

The most complicated, but most accurate method of determining how much money you will need in retirement is to determine a realistic goal of how much money you will require to live in retirement and then figure out how much savings you will need to achieve that goal.

This can be very difficult if you are a ways off from retirement, so it is best left for those that are close to their targeted retirement date. If you are close to retiring you should have a pretty good idea of your current and estimated lifestyle, your ongoing and planned expenses, and any other requirements you may have to setting up an anticipated budget.

For example, assume that you are currently spending $50,000 on various living expenses such as $1,000 a month mortgage (that will be paid off before retirement), $2,000 a year in gas for traveling to-and-from the office, and another $500 a year in work clothing. In retirement your mortgage will be paid off and those other expenses will go away, leaving your retirement spending at $35,500. Assume that you want to travel a bit in retirement though and expect to take a $3,000 vacation every year, that will increase your spending from $35,500 to $38,500. Don’t forget about healthcare and any other ongoing expenses that you might have in the future as well.

Once you have your anticipated budget you can then back into how you are going to meet that budget from your anticipated income. Your future anticipated income should include things like pensions, retirement accounts, IRAs, Social Security, and any other ongoing source of money you may have. To estimate your anticipated Social Security payments you can use the calculator on the SSA website.

To determine how much money you will need in retirement you simply net out the difference between the income you expect from your various sources and the expenses you expect to have. In the example above where you wanted to include a little bit of travel in your retirement you would need about $38,500 a year in income to account for your estimated spending. Social Security provides about $17,500 a year which would mean that your other accounts would need to contribute $21,000 a year.

**The 4% Rule**

This is where the 4% rule comes in handy. So you have determined that your annual expenses will be $38,500 a year. Subtracting the Social Security contribution and you still need $21,000 a year to cover your remaining expenses.

The 4% rule states that if you begin drawing down your savings by 4% a year at the beginning of your retirement, and adjust for inflation each year after, there is a relatively high probability that your savings will last 30 years.

Continuing the example above, after social security you need to cover an additional $21,000 in expenses when you retire. Using the 4% rule this means that your savings need to be at least $525,000 when you retire to cover those additional expenses for another 30 years.