A 2020 survey from Schwab Retirement Plan Services found the average 401(k) participant thinks they’ll need $1.9 million to retire, a 12% increase from the previous year’s survey. Of course, many people in the U.S. aren’t investing enough to reach that savings goal—and the income it brings.

To find out if your retirement income will be enough, you have to start by estimating your retirement expenses.

Retirement Expenses

There are various formulas to estimate retirement expenses, all of which are rough guesses at best. One well-known rule is that you’ll need about 80% of the amount you spend going into retirement.

That percentage is based on the fact that some major expenses will go down in retirement—commuting costs and retirement-plan contributions, to name two. Of course, other expenses may go up (vacation travel, for example—and, inevitably, healthcare).

Many retirees report that their expenses in the first few years not only equal to but sometimes exceed what they spent while working. One reason for this is that retirees simply may have more time to go out and spend money.

It’s common for retirees’ expenses to go through three distinct phases:

1. Higher spending early on
2. Modest spending for a long period after that
3. Higher spending near the end of life, due to medical or long-term care expenses

Standard of Living

Of course, future expenses are hard to predict. But the closer you are to retirement, the better idea you probably have for how much money you’ll need to sustain your current standard of living—or support a different one.

If you use that as a base, subtract any expenses you expect will go away after you retire, and add in any new ones. That will give you at least a ballpark figure to work with.

If you anticipate any big bills (a lot more travel, a brand new kitchen), be sure to count those in, too. Same for any major cost-savers—for example, if you plan to downsize and move to a less expensive home.

How Much Do I Need to Retire?

Many financial advisors boil down this answer to one rule of thumb, at least as a starting point: the 4% sustainable withdrawal rate.

Essentially, this is the amount you can theoretically withdraw through thick and thin and still expect your portfolio to last at least 30 years. Not every expert today agrees that a 4% withdrawal rate is optimal, but most would argue you should try not to exceed it.

If you stick to the 4% rule, here’s how much you could withdraw annually from three different nest eggs:

• $500,000—$20,000 a year
• $1 million—$40,000 a year
• $2 million—$80,000 a year

To figure out how much income you’ll need in retirement, take your estimated monthly expenses (be sure it’s realistic) and divide by 4%. So, for example, if you estimate you’ll need $50,000 a year to live comfortably, you’ll need $1.25 million ($50,000 ÷ 0.04) going into retirement.

Retirement Income

Now that you have some notion of your retirement expenses, the next step is to see whether your income will be enough to cover them. To do so, add up how much income you expect to receive from three key sources:

Social Security Retirement

If you’ve been working and paying into the Social Security system for at least 10 years and have earned 40 credits, you can get a projection of your Social Security retirement benefits by using the Social Security Retirement Estimator. The closer you are to retirement, the more accurate the estimate is likely to be.

Bear in mind that the earlier you take benefits, the less you’ll get each month. You can opt to take benefits as early as age 62 or as late as age 70, after which there’s no further incentive for waiting since you will receive the full amount whether it is age 70 or higher.

In June 2020, the average Social Security retirement benefit was $1,514 a month. The most you can receive depends on your age when you start collecting benefits.

For 2021, the maximum monthly benefit is:

• $3,895 if you file at age 70
• $3,113 if you file at full retirement age 66
• $2,324 if you file at age 62

For the 2022 tax year, the maximum monthly benefits are as follows:

• $4,194 if you file at age 70
• $3,240 at age 66
• $2,364 at age 62

Defined Benefit Plans

If you have a pension coming to you from your current employer or a former one, the plan’s benefits administrator can give you an estimate of how much you’ll get when the day comes.

If you have a spouse, you’ll want to consider your likely income under different scenarios, such as taking benefits in the form of a joint and survivor annuity, which continues to provide a specified percentage of your benefits to your spouse if you die first.

Retirement Savings

Retirement savings include everything you’ve stashed in your 401(k)s, IRAs, health savings account (HSAs), and other accounts you have earmarked for retirement.

If you have a traditional IRA or 401(k), you have to start required minimum distributions (RMD) at age 72. Note that Roth IRAs have no RMDs during your lifetime (although Roth 401(k)s do). Those RMDs will determine the monthly income you receive from those accounts once you hit age 72. Still, you can start taking money out of an IRA or 401(k) as early as age 59½ without a penalty.

Your Personal Bottom Line

So after you add it all up, if your total retirement income exceeds your predicted expenses, you probably have “enough” for retirement. It wouldn’t hurt to have more, of course.

But if it looks like you’re going to fall short, you may need to make some adjustments and find ways to increase your income, lower your expenses, or both. For example, you could:

• Work a few more years, if that’s an option
• Boost the portion of your pay that you set aside for retirement
• Adopt a more aggressive investment strategy
• Cut back on unnecessary spending (always a good choice)
• Downsize to a smaller, more affordable home

The sooner you do the math, the more time you’ll have to make the numbers work in your favor.

Saving vs. Investing

It’s worth noting that a year before almost two-thirds of the participants in the 2019 Schwab study considered themselves savers rather than investors. That’s a posture that can result in lower returns and retirement account balances.

In general, people save money to buy things and for emergencies. The money is there when you need it and it has a low risk of losing value—along with small potential gains.

Investing, on the other hand, is done with long-term goals in mind. When you invest money, you have the potential for better long-term returns, but with more risk. The key is to find the balance between risk and reward, based on your risk tolerance and time horizon.

Savings Rates: What’s Enough?

While it’s good to have a dollar amount as your long-term savings goal, it’s helpful to focus on how much you should sock away each year.

Ten percent is the historical recommended savings rate. Schwab further refines that to say that if you start in your 20s, you can retire comfortably with a 10% to 15% savings rate. Here’s how a few scenarios could play out for a future retiree.

5% Retirement Savings Rate

Let’s assume that Beth, a 30-year-old, makes $40,000 a year and expects 3.8% raises until retirement at age 67. Further, with a diversified portfolio of stock and bond mutual funds, Beth expects a return of 6% annually on her retirement contributions.

With a 5% savings rate throughout her working life, Beth will have saved $423,754 by age 67. If she needs 85% of her pre-retirement income to live on and also receives Social Security, then her 5% retirement savings are significantly short of the mark.

To match 85% of her pre-retirement income in retirement, Beth needs $1.3 million at age 67. A 5% savings rate doesn’t place her savings at even 50% of the funds she’ll need. Clearly, a 5% retirement savings rate isn’t enough.

10% and 15% Savings Rates

Keeping the above assumptions about her salary and expectations, a 10% savings rate yields Beth $847,528 at age 67. Her projected needs remain the same at $1.3 million. So even at a 10% savings rate, Beth misses the amount of her preferred savings.

If Beth pumps up her savings rate to 15%, she will reach the $1.3 million amount. Adding in anticipated Social Security, her retirement will be funded.

Does this mean that individuals who don’t save 15% of their income will be doomed to a sub-standard retirement? Not necessarily.

Conservative Assumptions

As with any future projection scenario, we’ve made some assumptions. Investment returns could be higher than 6% annually. Beth might live in an area with a low cost of living, where housing, taxes, and living expenses are below the U.S. averages. She might need less than 85% of her pre-retirement income, or she may choose to work until age 70. Her salary might grow faster than 3.8% annually.

All of these optimistic possibilities would net a greater retirement fund and lower living expenses in retirement. Consequently, in a best-case scenario, Beth could save less than 15% and have a sufficient nest egg for retirement.

What if the initial assumptions are too optimistic? A more pessimistic scenario includes the possibility that Social Security payments might be lower than they are now. Or Beth may not continue on the same positive financial trajectory. A quarter of the participants in the 2019 Schwab study, for example, had taken out a loan from their 401(k) with most of them taking out more than one.

Alternatively, Beth might live in Chicago, Los Angeles, New York, or another high-cost-of-living region where expenses are much higher than in the rest of the country. With these gloomier hypotheses, even the 15% savings rate might be insufficient for a comfortable retirement.

Measuring Your Needs

If you’ve reached mid-career without saving as much as these numbers say you should have put aside, it’s important to plan for extra savings or income streams from now on to make up for the shortfall.

Alternatively, you could plan to retire somewhere with a lower cost of living to make your money last longer. You can also plan to work longer, which will augment your Social Security benefits, as well as your earnings. And remember, your Social Security benefit will be higher if you wait until your full retirement age to collect. And it will be even higher if you delay until age 70.

If you’re looking for a single number to be your retirement nest egg goal, there are guidelines to help you set one. Some advisors recommend saving 12 times your annual salary. Under this rule, a 66-year-old $100,000 earner would need $1.2 million at retirement. But, as the former examples suggest—and given that the future is unknowable—there’s no perfect retirement savings percentage or target number.

The Bottom Line

Clearly, planning for retirement is not something you do shortly before you stop working. Rather, it’s a lifelong process. Throughout your working years, your planning will undergo a series of stages. You’ll evaluate your progress and targets, and make decisions to ensure you reach them.

A successful retirement depends not only on your own ability to save and invest wisely but also on your ability to plan. How much income you’ll need in retirement is hard to know and tricky to plan. But one thing’s for certain. It’s far better to be overprepared than to wing it.