You're asking "How much do I need?" and that depends on your retirement planning -- what you will do and how you will do it!
How Much Do You Need?
First, AARP and the College for Financial Planning (and others) all agree that retirees need at least 80 percent of their before retirement income to live on.
One quick comment here - Calculate 80% of your net take-home income, not gross income. Your net income is what you actually live on, so calculate net to net, not gross to gross.. there's a big difference in taxes!
Now, All of us have different "needs" and "wants".
The income AARP says retirees need after retirement is usually 80 percent of the spendable income that you live off of while still working. This is generally true -- but again, it always depends on you -- how much debt you have, whether you still pay house payments, how much you can cut back (or not!)
Also, many folks are living longer in retirement. Personally, I retired at age 55 and my mother is doing fine at age 87...IF I'm lucky enough to live as long as my mother, I have another 32 years of life left. Yikes!
We are also retiring earlier and in good enough health so that we spend more, and for many more years (travel, entertainment, and so on). Social Security (age 62 minimum) will replace approximately 45 percent of income for middle-income Americans... but if you retire earlier than 62, where does the other 55 percent of missing income come from?
When listing your expenses, consider the following:
Your house should be paid off, if possible (no rent/mortgage) OR your retirement income needs to be able to pay that rent/mortgage payment. You have no work-related expenses (commuting, business attire, eating out for lunch).
This is all savings for you...or, at least, don't count any of this in your expenses. Your children will be financially independent... we hope! Fewer taxes because of lower income. In some states, you don't pay state income tax on your pension income. Hopefully, best scenario, there is No debt.
In Retirement, what will you need to do to adjust your retirement income or expenses?
You may be able to reduce your expenses dramatically by changing your lifestyle at retirement. Also, if there are any additional major expenses that you anticipate (new windows, medical expenses, home maintenance), you will need a higher income to cover it.
Consider the following factors in determining how much you need during retirement:
Are you going to want to travel? Traveling to visit family, consider the cost of flying or driving to visit. If you'd like to travel, nationwide or international, you'll need to increase your income for your travel.
Will you relocate to an area with a low cost of living? to an apartment with less rent? Many people seek retirement locations where the cost of living is low, weather is nice, and the economy is mid-paced.
If you sell your house in a pricey area, you can buy a house in a less expensive area and add the difference to your retirement fund... that is, IF you can sell your home for a decent amount.
Do you anticipate significant medical expenses?
If there is any costly medical treatments that you need, it's a good idea to assume the worst and have money set aside to cover these potential expenses.
As you know, health care insurances are ever increasing to cover health related costs. The cost for prescription medications can be really high, especially as you grow older and become more likely to need medications.
Bottom Line: Don't ignore or underestimate the cost of maintaining your health in retirement.
Whether you elect to self-insure these costs (putting extra aside) or purchase insurance or medigap coverage, the costs for maintaining your health can be surprisingly high - just ask those you know who have already retired.
Will you still be working when you're retired?
Some people look forward to never having to work again, but others would like to continue working, just on their own terms (part-time, flexible schedules, not worrying about needing a high salary).
A part-time job or business can supplement your retirement income, but you need to ask yourself if you can reliably get work, for how many years in your retirement can you work, and how much money you can expect to make from such a job.
Are there any pensions or trust funds you can count on?
Have you considered inflation?
Every year, life gets a little more expensive, so what sustains you in your first year of retirement may not be enough in your tenth year of retirement.
Moreover, if you still have a good ten or more years before you actually retire, you'll need to account for the effect of inflation before you retire as well. Not long ago, an assumption of 3 percent inflation was workable, however forecaster reports current US inflation at 12.5%. WOW!
How long do you guess you'll be retired?
Think about at what age you'd like to retire, and how long you think your retirement will last. How long did your parents and grand parents live? That's not necessarily a good assumption, as you live life differently than they did, but its a guess.
Knowing how long you can expect to live after you retire can help you when it comes to preparing... it quite often shocks folks I meet with. It just never occurred to them to think about it!
Now, you need to make a retirement plan. The simplest way to think about retirement is to add up all the money you'll need during all of your years of retirement, and save up that much -- but for most people, that goal is way out of reach. It's not easy to anticipate what you might need for the next 20 - 30 years, and when you see that dollar amount, it is quite shocking!
Another way to approach it is to build a retirement fund that you can draw enough interest and principal from to sustain you through retirement.
This is where financial planners come in... as you might expect, it's very complicated to determine what kinds of investments will generate the income you need but now you have a much better idea of how much money you'll need per year when you're retired.
A good rule of thumb is to start setting aside 15% of your gross annual income just for retirement until you can develop a more reliable plan with a professional. This means setting it aside from when you first begin working, early on.. don't wait!
Finally, it is never too late to start preparing to retire. Yes, you should start when you're in your 20s, but life happens!