How Much Retirement Money Is Enough?

To estimate how much money you’ll need to retire, first get a rough idea with an online calculator using realistic assumptions. Then, work with a financial advisor to refine the numbers and come up with a savings goal. Next, decide roughly how much of your retirement savings you’ll withdraw each year.

It’s today’s million-dollar question: How much money will I need to retire?

Whether you’ll really need $1 million, more than that amount, or less, depends on a whole variety of factors. But what’s certain is that people today will live longer than previous generations. A 65-year-old has a 50% chance of living past 85, according to the National Center for Health Statistics. That means you’ll want your retirement income to last awhile.

Unlike earlier retirees, you probably can’t count on getting a steady pension from your employer. Social Security? It’ll probably be there when you retire, but just don’t expect today’s roughly $2,500 maximum monthly check (for full retirement age benefits) to be much bigger when you retire.
A 65-year-old has a 50% chance of living past 85, according to the National Center for Health Statistics. That means you’ll want your retirement income to last awhile.
It’s mostly up to you
Clearly, your retirement will be riding in large part on what you manage to save. And that may need to be a sizable amount. Consider this: At retirement, $1 million in savings could potentially generate about $40,000 in before-tax annual income (adjusted for inflation). Withdraw more than that amount from the $1 million annually and you'll run the risk of running out of money.

But don’t throw up your hands in exasperation. With smart planning and disciplined saving, you can begin to pursue your retirement goals.
An online calculator can help
If you haven’t run the numbers on how much money you should save for retirement, you’re likely in excellent company (unfortunately).

Rather than leaving your future to guesswork, get together with a financial advisor who specializes in retirement issues. You can also get an estimate of your retirement income needs by using My Retirement Plan®, our free retirement savings calculator.
Three key assumptions
To get a clear-eyed view of your retirement needs, make these three realistic assumptions:

1. You might live to 95. Not only will half of today’s 65-year-olds live past 85, but today’s 85-year-old has another 6 ½ years of average life expectancy, according to the National Center for Health Statistics. Unless you have a medical condition or family history making it unlikely that you’ll live into your 90s, the prudent planning move is to set your life expectancy to about age 95. That will help you avoid outliving your money.

2. Your investments will earn less than 10% a year, on average. How much your 401(k), IRA, and other retirement savings accounts will grow plays a big role in how much you’ll have in retirement. In the My Retirement Plan retirement calculator, you can choose an overall average annual rate of return for your accounts — both before you retire and during retirement.

Although the long-term average annualized return for the S&P 500 is about 10%, many market experts expect lower returns will be more likely over the next decade.

During your retirement, your anticipated rate should be lower, because you'll probably want to have most of your money invested in more predictable investments, such as bonds. A conservative (read: realistic) expected average annual return for your savings in retirement might be closer to 5%.

3. You’ll want to consider withdrawing about 4% of savings each year in retirement. Yet, according to the 2011 Wells Fargo Retirement Fitness Survey, pre-retirees expect to withdraw about 10% of their nest egg each year to support themselves in retirement. At that pace, however, it’s unlikely your money will last 10 years, let alone the 30 years you should anticipate. As the chart below shows, a retiree with 50% invested in stocks and 50% in bonds should keep annual withdrawals to just 4% to have an 88% or better probability of having her money last 30 years.
Likelihood of portfolio lasting over a 30-year retirement horizon
Source: Wells Fargo Advisors
The projections or other information generated by this analysis regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.

This simulation (commonly referred to as Monte Carlo) generates random returns based on the historical standard deviation forming a normal distribution around the mean. After returns for each asset class are generated, the returns are further refined by factoring in approximate 75-year correlations among the asset classes. This will result in a universe of returns for each asset class. The portfolio’s weighted average return is calculated based on each asset class’s weight in that scenario’s asset allocation, in effect rebalancing each year. The analysis does not contain information related to any specific security and as such does not favor any certain or specific security.

To evaluate the impact that unpredictable markets may have on financial objectives, the simulation measures these objectives against 1,000 randomly generated market performance scenarios. It uses both historical averages and volatility (ups and downs of the market as a standard of risk) of stocks, bonds, and cash to generate the random portfolio return scenarios.

Key Points:

  • Use the Wells Fargo Quick View Retirement calculator to estimate the amount to save for retirement.
  • Meet with a financial advisor to discuss the results and create a retirement-planning strategy.
  • Start figuring out how much of my savings I can withdraw annually in retirement.

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