5 steps to help you determine your target number

We all think about just how much we need to retire! Undoubtedly, some think about it more than others. Like so many financial topics, there is no black-and-white, fixed number that you must reach in order to retire.

$1,000,000 may be enough for some but not for others; there are just too many individual factors that will affect how much you need to retire. 

What you need to do is determine what your individual target retirement number is and what financial vehicles are going to give you that number.

For example, there are people that only have $100,000 in their investment portfolios, but they have businesses that generate passive income to cover their yearly expenses – so they retire.

Others accumulate their target number in investments while working and know that their retirement savings account will provide the majority of their income.

Then there are those lucky ones that know they will receive a pension and retire once the pension kicks-in. 

This article is mainly for those that have followed the more traditional amount of having a job and have saved and invested. Of course, you can tweak these numbers if you find other income sources, such as an income-producing business that doesn’t require you to put in hours of work (because that wouldn’t really count as retirement). 

1.  Know which factors affect your target retirement number

There are dozens of elements that can change how much you need in order to retire. Just think about how these will affect the exact amount needed to stop working:

  • Your debt burden
  • Where you live
  • Your desired lifestyle
  • Income streams
  • Healthcare needs

What are your retirement expenses?


Mortgage or rent, utilities, property taxes, maintenance, fees, and insurance


Groceries and eating out


Gas, routine maintenance, unexpected repairs, parking requirements, car insurance, and public transportation costs


Medical and dental insurance, medications, and supplies

Other Insurance

Life, disability, and long term care


Cell phone and plan, clothing, trips, fun

Saving needs

College tuition, wanting to make a life purchase


Student loan, credit cards, auto and any other. If you want to retire, eliminate your debt.

You can use this simple calculator to total these common expenses and get a better idea of what you will need in order to afford retirement. 

Your retirement lifestyle

Retirement should be fun and you shouldn’t have to be in a state of eternal frugality. Make sure that you don’t only consider the absolutely necessary. Think about your desired lifestyle and what you want to spend your time doing?

Is there a hobby you want to start? Do you want to travel in retirement? 

Consider these typical retirement stages, which depending on the source comes in 3-6 stages. Essentially, many retirees go through these stages:

Stage 1: A sense of adventure (and often the highest expense stage)

Stage 2: Adventure desire satisfied, need to settle in and some may return to work

Stage 3: Rest & relaxation stage

Also, think about if you want to spend every last penny of what you saved or do you want to leave assets to your family?

All of these factors obviously affect your target number and only you know what kind of life you want to live, what your plans are, and how much you are going to need in retirement. 

Even though this should be a very individualized exercise, there are some blanket rules-of-thumb to help you easily determine your target number

For healthcare, how will you cover the cost of insurance? As we age, we typically need more healthcare services, which keep increasing exponentially.

2. Use these rules of thumb for determining your target retirement number

Let’s look at some very common rules-of-thumb that can be used to figure out your target number. These guidelines are assuming that your retirement income will come from a combination of social security and retirement investments such as IRAs and 401(k)s.

  • The 4% rule
  • The 25 times rule
  • The 80% of income rule

These “rules” are general guidelines and useful starting points. There is no doubt that they have limitations as well. 

The 4% rule (also known as the safe withdrawal rate) is a guideline that helps you determine how much to withdraw each year from their investment and retirement account(s) each year. It assumes that once you have a certain amount of money accumulated, the interest generated by that money will provide the needed income (by withdrawing 4% annually) without the retiree having to cut into the premium amount.

Of course, your portfolio may have returns of 10% on the year, and -2% the next. But the average should be around 9% annual return. So withdrawing 4% is a safe and reasonable amount to provide income without. Although this rule refers to withdrawal rates, it can be used to determine how much will be needed if 4% is to be withdrawn each year.

I personally DO NOT believe you need 9% per year to draw 4% per year in income. This is VERY individualized and in a low-rate low-return environment these general guidelines don’t always make sense!

Greg Phelps, CFP®, CLU®, AIF®, AAMS®

The 25 times rule asks you to evaluate what you expect your annual expenses to be in retirement and multiply that number by 25. For example, if you expect to need $70,000 a year to cover all of your expenses, multiply $70k by 25 = $1.75 million (your target number). 

The 80% of income rule refers to a general target to aim for when determining how much income you want in retirement. The rule is simple and assumes that most people will be happy and fine if they can have 80% of their working salary in retirement.

The 80% rule also assumes that by the time you retire, you probably will have fewer expenses than during your working years. Many factors can change this, however, and someone who made $300,000/yr versus a salary of $60,000/yr will view this rule differently. 

You should realize that determining your target number isn’t a static process, it’s dynamic. Things are going to change and it will be in your best interest to revisit your portfolio often and speak with your financial advisor in case any adjustments are needed in your portfolio. 

Under and over-estimating

Many people underestimate costs and overestimate income which paints a false picture of retirement readiness. Be conservative with your numbers because if you can hash out a reliable and well-thought-out plan with conservative figures you will have a greater chance of knowing your exact target number.

There are many online calculators that you can use to help you determine your target number. The great thing about many calculators is that you can adjust for inflation, poor annual investment returns, and expected social security benefits. These calculators can help avoid overestimating returns or forgetting about inflation. 

3. Use a retirement calculator to help you see if you are on track to reach your target retirement number:




Keep in mind what I said above about over-estimating income and underestimating expenses. If you use the calculators, run several scenarios including a very conservative one (as in low market returns, lower contributions, and high spending years).

A calculator is only a tool and functions as an estimate. However, don’t let a calculator give you false hopes about your retirement. Read this article about some of the cautions to be used with online retirement calculators.  

4. Add up expected income from different sources

There are a variety of income streams at your disposal when you reach retirement, and these incomes are broken into taxable and tax-free.

Depending on your situation, you will use specific retirement accounts that you have built over the years and you will need to know how to use them wisely. The goal here is to pay the minimum possible amount in taxes. Implementing a plan to fit a few of these income options will benefit you in the long run.

Taxable Income includes:

  • Pensions
  • Pre-tax retirement accounts (ie. 401(k)s and 403(b)s)
  • Dividends, capital gains, and interest of taxable investment accounts
  • Social Security (depending on your income level)

For tax-deferred accounts such as a 401(k), make sure you understand how required minimum distributions work. Failing to take a distribution will incur a steep tax penalty. 

Tax-Free income includes:

  • Withdrawals from Roth IRA
  • Life insurance policy loans
  • After-tax contributions in accounts like a 401(k)
  • Health Savings Account (if used properly)

The hardest hitting tax-free account is a Roth IRA. Not only are you able to invest after-tax deposits, but it is also a great vehicle to build your savings habit. 

Ask your financial advisor if a Roth conversion may be a beneficial strategy for you prior to retirement. This would allow you to make tax-free withdrawals in retirement.

Health Savings Accounts (HSA)

Although this type of account is not technically a retirement account, you’re able to use it like one, even for non-health expenses after age 65. This is the only triple-tax advantaged account since contributions qualify for tax deductions, the contributions grow tax-free within the account, and withdrawals are not taxed if used for qualifying health expenses or made after age 65.

Social Security

Not all of your income has to come from invested money. If you have been working for at least 10 years and are at least 62 years old, you are eligible to receive Social Security. If you’re able to wait till you’re 70, then you will receive the maximum benefit it can provide.

Check out the Critical Retirement Dates and Deadlines chart to the right. The amounts you’ll get at various ages for Social Security are listed out.

Make sure you maximize your Social Security benefits! Only 4% of all retirees do!

The Social Security Administration has a calculator you can use to quickly estimate your earnings on your own, but you will need to think about the overall plan you have and how Social Security will play into it.

Your Social Security benefit needs to be discussed with your financial advisor since the age that you begin to claim the benefit has a profound impact on the amount of money you receive monthly. 

Other income

Passive income has become a big part of today’s economy as more and more people set up online businesses that require little to no active participation on the part of the owner. 

Having a passive income to help with your retirement is an added bonus and enables you to better live the retirement lifestyle you want. Most common means of passive income are rental properties and stock dividends along with passive online streams (selling products and services online). Passive income may even help you retire earlier than you thought possible. 

Now compare your expected income to your expected expenses. This will give you a great idea of exactly how much you need to retire. 

5. Protect yourself from losses

There are additional variables beyond the normal accounts which you need to consider when it comes to planning for your retirement.

Inflation rates: you can factor in a 2% inflation rate though it could be possible for it to reach 3-4%. This rate alone can hinder your most basic savings that are not tied into the market and weaken your purchasing power over time.

Check out this table to look at historical inflation rates for the U.S. We have seen years with much higher inflation than we have in the last decade. 

Emergencies: When there is an accident or a major life event that you need financial assistance with, it’s good to have some money on hand. It’s also valuable to have insurance cover the biggest incidents while paying for something out of pocket will save you more in the long run.

There is not a way to be absolutely prepared for an emergency but you can do the best that you can. Life happens, have a plan for it and don’t let it ruin your retirement. 

Length of retirement: You can plan ahead to the best of your ability, but you will never really know how long you will need your retirement savings to last. It’s common to project an average of 20 years as a great starting point. Your decision to work a little bit during this time will also assist in stretching out your savings.

Market volatility and asset allocation: No one can predict when the market will take a hit. But if it does, how will it affect you? Having a well-diversified portfolio with proper allocations is extremely important. You don’t want to have all of your money in stocks, or in any single investment type for that matter, as you approach your retirement age.

So what’s your target number?

It may take some investigating, reading, and digging around to determine your target number but something tells me that if you are reading this, it’s going to be a fun adventure.

All in all, your target retirement number depends on your situation, what lifestyle you want, and the planning you’ve put into it. You might only have a 401(k) or you might have a combination of income types and so the amount of money that you need to retire will look different. 

No matter what your age is, completing this exercise can help you clarify your future. Of course, navigating all the expenses and account options can be overwhelming.

Feel free to reach out and talk to us to see how we can take the pressure off of your shoulders and make retirement planning easy for you and your family.