3 Retirement Rules That Will Tell You Exactly How Much You Need For Your Golden Years

If you’re planning for retirement, you likely want the certainty of knowing exactly how much you’ll need in your golden years. If you know how much you’ll need, you can invest to be right on target.

Unfortunately, what you actually need will only be known with the passage of time. The exact number relies, of course, on your longevity as well as your needs and wants. Your retirement savings won’t go far if you’re buying Cadillacs on a Chevrolet budget. 

But financial advisors have a range of rules to help gauge how much you need for retirement. Here are three of their retirement rules to help you find the budget you’ll need to retire as you want.

Start with your retirement budget, then work backward

All but the very richest of us can outspend our level of income or wealth, so it’s vital that you start with your budget first. Come up with a good idea of what you spend each year and then build in the effect of inflation over time.

For example, if your spending is $60,000 each year and you’re planning to retire in 10 years, you’ll want to build in an inflation adjustment — perhaps 3 percent annually — to get a better estimate of what you may actually need at that time.

Once you have this figure, you can work backward to determine how much you’ll need to meet that budget. But you won’t likely have to come up with that whole amount yourself. You’ll have Social Security to help bridge the gap between your budget and what you’ll need to fund. You can use Bankrate’s Social Security calculator to get an estimate of your future benefit.

Even an average Social Security benefit can go a long way in helping you reach your budget. And if both you and your spouse are collecting a check, your budget may be that much more in reach. 

Once you have the amount you’ll need after Social Security, you can think about any other sources of sustainable income, such as annuities, that could fund your income. Deduct all those sources of income from your budget, and you’re left with what you’ll need to fund each year. The retirement rules below can help you determine the assets you need in order to meet that need.

3 retirement rules that can help you retire comfortably

The retirement rules below are helpful guidelines to determine how you’ll fund your share of retirement. These rules have to do with the safe withdrawal rate for your savings, helping to ensure that you don’t outlive your money in retirement. 

1. The 4% rule

The 4% rule is one of the cornerstones of financial planning, and while critics have challenged it over the years, it still remains as a solid guideline. The rule suggests that you can safely withdraw 4 percent of your investment portfolio in your first year of retirement and then adjust for inflation in future years to determine the optimal withdrawal rate. This rule should allow you to enjoy a 30-year retirement with a relatively small chance of outliving your money. 

If you want to make this rule even more conservative and reduce the risk that you outlive your money even further, you could change it to the rule of 3 percent. One of the central criticisms of the original rule — that it’s not conservative enough to virtually eliminate the risk of outliving your funds — can be quickly adjusted if you’re willing to plan even more conservatively. That said, some planners think it’s still safe to withdraw more than 4 percent, saying that even 5 percent is safe. 

2. The 25x rule

The 25x rule, or the rule of 25, says that you need to have saved 25 times what you’ll need to take from the portfolio in the first year. The rule is based on the assumption that you could safely withdraw 4 percent of the account annually over a 30-year horizon. If you’re invested in assets that grow, the amount that’s in the account may grow to offset your annual withdrawals. 

Those who want to plan on a longer retirement need to be more conservative. For example, those who are part of the FIRE movement (Financial Independence Retire Early) may want to use a rule of 30 or 40 to reduce the chances that they run out of money in retirement. 

3. 100 minus your age

This rule is a shorthand to determine how much you should have invested in stocks based on your age. To use it, you subtract your age from 100 to determine the percentage of your investment portfolio that should be in stocks. For example, if you’re 72, the rule suggests that you should have 28 percent of your investments in stocks and the remainder in safer bonds or cash-yielding investments, such as CDs.

The idea behind the rule is to balance growth and safety so that you have income today but don’t outlive your assets in retirement. Stocks offer the potential for growth over time but are volatile in the short term, meaning you can’t count on tapping them at any specific point in time. They’ll help keep you from outliving your assets, however, but you don’t want to over-rely on them.

In contrast, the safer, less volatile portion of your portfolio — the bonds and CDs — can generate income that you can use as income today. However, these elements won’t grow over time, since you’re using the income now. Together, these elements balance out your income and growth. 

Because people are living longer than ever before, some advisors may use a rule of thumb such as “110 minus your age” to ensure that retirees have more assets over time. This revised rule means you’ll keep more in growth assets such as stocks at the start of retirement and give your assets a longer runway to grow early and sustain you over a potentially longer lifetime.

Retirement rules are just guidelines

These retirement rules are not rules in the sense that you must follow them. Things may work out just fine if you’re more aggressive than these rules suggest, and you can always make them more conservative to suit your risk tolerance. They’re ultimately guidelines to help you make smart decisions. That said, it’s still not a great idea to take a chance on your retirement money not being there when you need it and have no other way to make more.

So, financial advisors use these rules as guidelines to help you craft a retirement plan that meets your needs. And they remain a good signpost for a quick at-home calculation to confirm you’re doing what you need to for retirement. But financial advisors will also use more sophisticated programs to measure what you’ll need in retirement — factors such as rising healthcare or housing costs.

A financial advisor can build you the best retirement plan and give you the confidence you need that money will be there when it’s time to retire. Here’s how to find a top advisor in your area.

Bottom line

These retirement rules can help you make smart decisions when it comes to planning how much you need for retirement. But they won’t replace years of saving. So starting the discipline of saving and investing is the place to begin when it comes to making your golden years special.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.