How Much Money Do You Need to Live Comfortably in Retirement?

How much money do you need to live comfortably in retirement? According to the Society of Actuaries, many retirees spend the bulk of their time exercising, visiting with children and grandchildren, exploring hobbies, and traveling — activities that can all vary widely in cost. So the reality is that what you need to be comfortable will be different for everyone.

Whether your idea of living comfortably is seeing the world or babysitting your grandkids every day, you’ll want to have a plan in place to generate the income you’ll need. With the right plan, you’ll find that you can worry less about affording your lifestyle and focus more on enjoying life.

How much money do you need to live comfortably?

Estimate how much you’ll need in retirement

Before you can figure out how much you’ll need to live comfortably in retirement, you first have to determine what being comfortable means to you. To do that, ask yourself questions about what’s important to you: Are you motivated by your job and want to continue working as long as possible? Or do you want to retire early? Are you feeling the pull of wanderlust, or do you see yourself staying closer to home? Do you want to take up an expensive hobby or would you be perfectly content spending your days reading?

These kinds of questions will help you start to budget for what you’ll need once you stop working, and there are a few costs to consider. There will be fixed costs, like housing and basic living expenses, along with your goals for this chapter of your life. One reasonable starting point is to assume that you’ll want to replace 80 to 85 percent of your pre-retirement income. But everyone’s situation is unique.

The age at which you retire will also impact your cost of living when you’re no longer working. For health insurance, if you plan on leaving the workforce prior to age 65 (which is when Medicare kicks in), you may need to factor in higher health care costs. That includes health insurance premiums and annual deductibles — two expenses that can add up quickly in retirement.

Create a plan to generate the income you’ll need to live comfortably.

When you’re no longer earning an income, that means it’s up to you to create a paycheck each month. Unfortunately, that’s not always as simple as stashing your savings in the bank and writing checks as you need.

One of the first considerations will be Social Security. Social Security will provide a regular monthly check for as long as you live. That makes it the basis for nearly all retirement income planning. While you can start claiming benefits as early as age 62, doing so will lock in a lower monthly benefit for life. Each month you wait until you’re age 70 will get you a higher benefit — which will last for the rest of your life.

Next, you’ll likely lean on your retirement savings. While there are a number of ways to go about it, one general way to determine how much income you can generate with your savings is the 4 percent rule. The rule suggests you withdraw 4 percent of your income during your first year of retirement. After that, you continue taking the same amount each year, plus a little extra to cover the cost of inflation.

It’s important to note that the 4 percent rule was developed many years ago. So it’s best to use it as a starting point for determining how much income you may be able to generate. You may need to revisit your retirement savings target and find that you’ll need to reduce your cost of living — or delay retirement — to ensure you’re able to live comfortably and make your nest egg last.

Plan for risks to your retirement income

When you’re looking to live comfortably off your savings, the last thing you want is to worry about any risks that could eat into your savings over time. This includes market volatility, how long you’ll live, taxes, inflation, healthcare expenses and your legacy (if you want to leave something behind).

One way to hedge against these risks is to include a range of financial options in your retirement income plan. This could include investments for growth, the cash value of permanent life insurance for protection and guaranteed growth and an annuity for guaranteed income (in addition to what you’ll get from Social Security).

You’ll also want to be strategic about how you use certain accounts in retirement. For instance, if you have 401(k) and traditional IRA accounts, you’ll be taxed on those distributions, which can be an unexpected chunk of your nest egg if you’re not expecting it. Having a mix of accounts like Roth IRAs, life insurance cash value and health savings accounts can help minimize your tax liability in retirement.

A financial advisor can help you build a plan that uses a mix of diverse financial assets in a way that allows you to generate more reliable income with your savings while hedging for risks that could impact that income. Having such a plan can help you feel more confident about your ability to generate the income you’ll need to live comfortably for the rest of your life.