I'm Retiring With $400,000. Am I in Good Shape?

If you have $400,000 in your retirement accounts, are you financially ready to retire? Unfortunately, there isn't a straightforward yes or no answer to that question.

In simple terms, your retirement savings need is a combination of several factors. These include your current income, age, plans for after retirement, other retirement income sources, and more. By using some basic rules of thumb, you can get a good estimate of how much you might need to save for a comfortable retirement.

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It's not about the nest egg

Here's one of the most important retirement savings concepts you can learn. It doesn't necessarily matter how much money you have saved -- the better question is how much income can your savings produce?

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Think of it this way. Let's say there are two retirees, and one has $500,000 in savings and a $1,500 per month Social Security income. The other has virtually no money in savings but has a $4,000 monthly pension in addition to a $1,500 Social Security check. Which is in better financial shape? If you ask me, I'd rather be the second one.

How much savings do you need?

There are no set-in-stone guidelines that can tell you the ideal amount of retirement savings, and even if there were, there's no way to know how your retirement investments will perform. But here's a basic set of steps that can help you determine approximately how much you should aim for.

First, determine how much income you'll need after you retire. Many financial planners suggest that you'll need about 80% of your pre-retirement income to maintain the same standard of living. So, if you earn $100,000 now, plan to need $80,000 per year in total income after retirement. (Of course, this isn't a perfect guideline. Adjust up or down if you anticipate different spending needs.)

Next, figure out how much will come from other sources. Virtually all retirees will have Social Security income, and if you have any pensions or annuities, be sure to consider those.

The difference will need to come from retirement savings in your investment accounts. The admittedly imperfect 4% rule of retirement says that you should be able to withdraw 4% of your savings in your first year of retirement, and increase your withdrawals for inflation in subsequent years, without much chance of running out of money.

To apply the 4% rule, simply multiply your income needed from retirement savings by 25 to determine how much you'll need to retire comfortably.

An example

Let's look at how this works. We'll use an example of a married couple with a household income of $100,000, so they'll need a total of $80,000 in income after retirement to live comfortably.

First, we'll say that each spouse will get $1,900 per month from Social Security, which is approximately how much the average retired worker gets in 2024. Between the two of them, this is $45,600 per year. We'll also say that one spouse expects a $1,000 monthly pension, for another $12,000 in annual income.

Subtracting these income sources from $80,000 shows that this couple will need about $22,400 from their retirement savings. Multiplying by 25 gives a ballpark retirement nest egg of $560,000 for a comfortable retirement. So in this case, $400,000 in savings isn't quite enough.

Finally, keep in mind that this is in today's dollars. It doesn't reflect any inflation that takes place between now and when you're ready to retire. Keep this in mind as the years go on and you reassess your progress.

The bottom line

Like most personal finance topics, there's not an easy answer to the question of "how much should I have saved before I retire?" And there isn't a perfect one-size-fits-all method to figure it out. But using guidelines like those discussed here can help you get a solid estimate of your retirement savings target that can help you adjust your savings strategy and retirement timeline as needed.