Deciding on your ideal net worth at retirement can seem like a daunting task. With so many factors to consider from life expectancy, to potential healthcare costs, to desired retirement lifestyle, determining the right retirement savings goal number to aim for is key to making sure your nest egg lasts as long as you need it to. While there is no one-size-fits-all answer, understanding how different financial situations and retirement spending needs impact how much net worth you should aim to have saved can help you land on a target that makes sense for your unique circumstances.
What is net worth?
Before determining your ideal net worth at retirement, it’s helpful to understand exactly what net worth is. Net worth is a snapshot of your financial health at any given time. It is calculated by totaling the value of everything you own (your assets) and subtracting everything you owe in debts (your liabilities).
Your assets can include:
– Retirement accounts like 401ks and IRAs
– Brokerage and investment accounts
– The current value of your home
– Cars or other vehicles
– Cash savings
– Valuables like jewelry, art, or collectibles
Your liabilities can include:
– Mortgage debt
– Credit card balances
– Student loans
– Auto loans
– Personal loans
– Any other outstanding debts
To find your net worth, simply add up the current dollar amounts of all your assets, and subtract all your liabilities. The result is your net worth.
What factors impact your ideal retirement net worth?
Many variables should be taken into account when determining your target net worth for retirement. Key factors that can influence how much net worth you should aim to have saved at retirement include:
When you plan to retire
The earlier you retire, the longer your retirement will be, and the more money you’ll need saved to cover your expenses. Retiring at age 55 instead of 65 means you need your nest egg to last 10 more years.
Your desired retirement lifestyle
The retirement lifestyle you envision directly impacts your ideal retirement net worth number. If you plan to travel often or pursue expensive hobbies like golf or boating, you’ll need a bigger nest egg than someone who wants a simpler, less costly retirement.
Where you plan to live
Your ideal retirement home impacts how much you need saved. If you plan to live in an expensive area like New York City or the Bay Area, you’ll need to account for higher housing costs than if staying in a lower cost of living location.
Your health
Your current health, family medical history, and potential health issues to prepare for should be factored in. More health expenses in retirement mean a higher ideal net worth number.
Whether you’ll have pensions/annuities
If you will have income outside of withdrawals from your retirement savings, like pensions or annuities, you may need a lower total net worth at retirement. These additional income streams impact how much you need to take from savings.
Anticipated healthcare costs
Rising healthcare costs can take a major bite out of retirement income, so factoring in what healthcare may cost based on your health, Medicare coverage, and supplement insurance needs impacts your ideal net worth.
Longevity
The longer your retirement lasts, the more years your savings needs to cover you. Review average life expectancy, and consider how long your family members have lived to estimate how long you’ll need your net worth to provide retirement income.
Inflation
Inflation causes the prices of goods and services to rise over time. Historically inflation is around 3% per year. Accounting for 25-30 years of inflation eroding your purchasing power impacts how much net worth you need today to maintain your standard of living in retirement.
Interest rates
Interest rates impact how much retirement income your savings can realistically generate. Lower rates mean lower returns, and less income from savings. Factoring in realistic projections for investment returns based on interest rates helps land on an accurate net worth target.
Tax rates
Both income tax rates and capital gains tax rates can significantly impact retirement cash flow. Knowing whether you’ll be in a higher or lower tax bracket in retirement helps determine ideal net worth since after-tax income affects how far your money will go.
Supporting others
If you plan to financially support children, parents, or grandchildren during retirement, more assets may be needed to cover additional costs. Think through any family members you intend your retirement net worth to help support.
How much net worth do you need to retire?
So exactly how much net worth should you aim to build by retirement? While there are general guidelines, the ideal target is extremely variable depending on all the factors discussed above. Here are some estimates:
– $1 million net worth – often touted as the magic number for retirement. However, $1 million may not be enough for more expensive areas or longer retirements.
– 10x your ending salary – For example, if you make $100,000 right before retirement, aim for $1,000,000 net worth ($100k x 10). This benchmark multiplies your income by your career length (i.e. 10 years).
– 25x your annual expenses – If your estimated retirement spending is $40,000 per year, aim for $1,000,000 net worth ($40k x 25). This accounts for living expenses being lower in retirement.
– 80% of your current income – Reduce your current income by 20% to estimate retirement income needs, and multiply that by 25. So $100k current income becomes $80k retirement income need. $80k x 25 = $2,000,000 target net worth.
These benchmarks provide a starting point, but calculating your target based on a detailed retirement budget and specific needs is ideal for a more accurate number.
How much should you have saved at different ages?
While your ultimate net worth target depends on your specific retirement situation, most financial advisors agree your retirement savings should hit certain milestones by different ages:
Age 30
– 1x your starting salary saved
Age 35
– 2x your starting salary saved
Age 40
– 3x your starting salary saved
Age 45
– 4x your starting salary saved
Age 50
– 6x your starting salary saved
Age 55
– 7x your starting salary saved
Age 60
– 8x your starting salary saved
Age 67
– 10x your ending salary saved
So if you started working at age 25 with a $50,000 salary, you’d aim for:
Age 30: | $50,000 saved |
Age 35: | $100,000 saved |
Age 40: | $150,000 saved |
Age 45: | $200,000 saved |
Age 50: | $300,000 saved |
Age 55: | $350,000 saved |
Age 60: | $400,000 saved |
Age 67: | $500,000 saved |
These retirement savings benchmarks can help keep you on track for your specific net worth goals.
Tips for hitting your ideal net worth target
Reaching your ideal net worth number by retirement requires diligently building wealth over your working years. Here are some tips:
– Start saving early – Let compound growth work in your favor over long time horizons.
– Contribute the max to retirement accounts – Fully fund 401ks, IRAs, and other tax-advantaged plans.
– Limit spending and stick to a budget – Don’t overspend or lifestyle inflate. Carefully budget!
– Pay down debt – Debt drains wealth. Eliminate credit cards, loans, and other debt.
– Invest wisely – Invest in diversified stocks and balanced funds for healthy returns over time. Avoid high fees.
– Buy real estate judiciously – Owning rental property or your home can build net worth. Time purchases right.
– Receive income raises and bonuses – Negotiate pay increases and maximize bonuses to boost savings.
– Find side income streams – Freelancing, monetizing a hobby, or driving for Uber can all supplement savings.
– Consider relocating – Move to a lower cost area before or in retirement to make savings last longer.
– Delay Social Security – Waiting to collect can significantly increase your monthly Social Security income.
The impact of starting to save early
Starting to build your net worth in your 20s or 30s can significantly reduce the amount you need to save each month to hit your target. Here is an example assuming a 6% average annual return:
Start Age: | 25 | 35 | 45 |
Monthly Savings: | $416 | $833 | $1,664 |
Retirement Savings at 65: | $1 million | $1 million | $1 million |
As you can see, starting early means smaller monthly contributions are needed to end up with the same $1 million net worth by age 65. Delaying savings requires much larger monthly contributions to catch up.
The cost of underestimating retirement needs
Underestimating your retirement net worth needs can leave you financially struggling later. Here is how a hypothetical $750k nest egg might perform over 30 years at a 4% safe withdrawal rate:
Year 1: | $30,000 income |
Year 10: | $30,900 income |
Year 20: | $31,836 income |
Year 30: | $32,808 income |
If $50,000 yearly income is needed, this $750k net worth would fall short, running out of money in year 22. Having too low a net worth can lead to major financial issues down the road.
Next steps to determine your ideal net worth
Figuring out your perfect retirement net worth target takes research on the factors unique to your situation. Here are next steps:
– Document your current household net worth – Tally all assets & liabilities.
– Estimate life expectancy, retirement duration, & health costs.
– Define your desired retirement lifestyle and associated costs.
– Research projected inflation and healthcare expense rates.
– Consult retirement calculators.
– Work with a financial planner to run projections.
– Build a retirement budget with your specific income & spending.
– Model different net worth scenarios and withdrawal strategies.
– Aim higher than you think – It’s better to end up with extra than run short.
Determining and sticking to the ideal retirement net worth target for your unique circumstances takes concerted effort. But ensuring you build sufficient wealth by retirement to fund your desired lifestyle for the long-term makes that effort well worth it. With proper planning and disciplined saving, you can enter your retirement years with financial peace of mind.