Retirement Savings Target: Start From Your Monthly Expenses

Michael Chen

Michael Chen writes about personal finance fundamentals. Bay Area-based · finance enthusiast for 15 years.

Visual representation of the voice · not a photographic portrait

Quick answer: Add up what you spend in a normal month, adjust it for retirement, and subtract the income you expect from Social Security or a pension. Multiply the monthly gap by 12, then by 25. That gives a rough target you can refine with a fee-only financial planner.↗ Share on X

To find how much you need for retirement, start with what you spend now. Add up a normal month of spending, adjust it for the life you expect after you stop working, and subtract any monthly income you will still get, like Social Security or a pension. Take the monthly gap, multiply it by 12, then multiply by 25. That number is your rough savings target. It is not exact, but it is far better than guessing, and you can do it tonight with your bank statements.

The rest of this page shows each step, a full example, and the mistakes that make people aim too low.

Why start from expenses instead of income?

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Most online calculators ask about your salary. They often say you will need 70% to 80% of your income. The problem is that your income is not what you live on. Part of your paycheck goes to taxes, to your 401(k), to commuting and to work clothes. Some of that stops when you retire.

Your expenses are what you actually need money for. If you spend $3,800 a month today, that is a real number from your real life. Building your plan on it makes the target fit you, not an average person.

Step 1: How do you find your real monthly spending?

Do not trust your memory. Most people underestimate their spending by a lot.

1. Download the last 3 months of statements from every checking account and credit card.

2. Add every purchase and bill. Ignore transfers between your own accounts.

3. Divide the total by 3. This is your average month.

4. Look at the last 12 months for bills that come once or twice a year: car insurance, property tax, holiday gifts, car repairs. Add them up and divide by 12. Add that to your average month.

That last step matters. Yearly bills are the ones that break a retirement budget, because nobody remembers them when they think about "normal" spending.

Step 2: What changes when you retire?

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Now go line by line and ask: will this still exist when I stop working?

Costs that usually go down or disappear:

• Retirement contributions (you stop saving and start spending)
• Payroll taxes like Social Security and Medicare tax on wages
• Commuting, parking and work clothes
• Mortgage, if it will be paid off by then
• Costs of raising children, if they will be on their own

Costs that usually go up:

• Health care. Medicare starts at 65, but it does not cover everything. Premiums, deductibles, dental, vision and hearing aids come out of your pocket.
• Travel and hobbies, especially in the first years of retirement.
• Home repairs, as the house and you both get older.
• Help at home later in life.

Write a new monthly number for each line. Be honest. A plan built on a budget you will not follow is just a wish.

Step 3: What income will you still get each month?

Your savings do not have to cover everything. Subtract income that keeps coming in:

• Social Security. Get your personal estimate at ssa.gov. The amount changes a lot depending on the age you start. Claiming at 62 pays less each month than waiting until your full retirement age or until 70.
• Pension. If you have one, your employer can give you an estimate.
• Part-time work or rental income, only if you are fairly sure it will happen.

Do not count money you hope for, like an inheritance. If it arrives, it is a bonus.

Step 4: How do you turn the gap into a savings target?

Take your adjusted monthly spending and subtract your monthly retirement income. That is your monthly gap: the part your savings must pay.

Then:

1. Multiply the monthly gap by 12 to get the yearly gap.

2. Multiply the yearly gap by 25.

Why 25? It comes from the "4% rule," a guideline based on past U.S. market history. The idea: if you take out 4% of your savings in the first year of retirement and raise that amount with inflation each year, your money has a good chance of lasting about 30 years. Twenty-five times your yearly gap is the same as saying the gap is 4% of your savings.

This is a rule of thumb, not a promise. Markets can do worse than they did in the past. Many planners use a lower withdrawal rate, like 3.5%, which means multiplying by about 28.6 instead of 25. If you retire before 60, a lower rate makes even more sense, because your money has to last longer.

A full example from start to finish

Let us follow Dana, 45, who wants to retire at 67.

Dana's Social Security estimate at 67 is $2,000 a month. There is no pension.

• Monthly gap: $3,300 − $2,000 = $1,300
• Yearly gap: $1,300 × 12 = $15,600
• Target with the 25x rule: $15,600 × 25 = $390,000
• Target with a safer 3.5% rate: $15,600 × 28.6 = about $446,000

So Dana should aim for somewhere between $390,000 and $446,000, in today's dollars.

What about inflation?

The example uses today's prices. In 22 years, $3,300 will buy less than it does now. You can handle this in two ways:

1. Keep everything in today's dollars. Use your target as is, and when you estimate how your investments will grow, use a growth rate after inflation. This is the simplest way and the one most beginners should use.

2. Convert to future dollars. Grow your expenses by an inflation rate each year until retirement. This gives a much bigger number that can feel scary, but it is the same target, just measured in future money.

Do not mix the two. If your target is in today's dollars, your growth rate must also be after inflation.

How much do you need to save each month to get there?

Once you have a target, compare it with what you already have. If Dana already has $120,000 saved, the remaining gap is what monthly saving must cover over 22 years.

Free calculators can do this math for you. Look for:

• The calculator from the SEC's investor education site, Investor.gov, which has a compound interest tool.
• Your 401(k) provider's website, which often shows a projection based on your real balance.

Try a few growth rates, from cautious to middle-of-the-road, and see how much the monthly amount changes. If the low-growth version is out of reach, the answer is not to assume a higher return. The answer is to save more, work a bit longer, plan to spend less, or delay Social Security.

The mistakes that make your target too small

• Forgetting yearly bills. Car repairs and property tax are real every year, even if they do not show up every month.
• Guessing health care too low. This is one of the biggest costs in retirement for many people, especially before 65 if you retire early.
• Counting the full Social Security amount at 62 when you plan to claim at 62. Use the number for the age you will really claim.
• Ignoring taxes. Money taken out of a traditional 401(k) or IRA is usually taxed as income. If most of your savings are pre-tax, add a margin for taxes to your monthly spending.
• Doing the math once. Your life changes. Redo this every year or after a big event like a move, a new job or a divorce.

When should you talk to a professional?

This method gives you a solid starting number. It cannot handle everything. Talk to a fee-only financial planner (one who charges a set fee and does not earn commissions on products they sell you) if:

• You plan to retire before 60.
• You have a pension and need to choose between a lump sum and monthly payments.
• You own a business or rental properties.
• Most of your savings are in one type of account and you are worried about taxes.
• You are married and need to decide when each of you should claim Social Security.

A good planner will test your number against bad market years and help with the order in which you spend from each account. No one can promise how markets will behave, so be wary of anyone who says they can.

Your next step tonight

Open your bank and credit card apps and download the last 3 months of statements. Add up the total, divide by 3, and write that number on paper. That single number is the foundation of your retirement target. Tomorrow, go to ssa.gov, get your Social Security estimate, and finish Steps 2 through 4. In less than an hour, you will know your target instead of guessing it.

FAQ

Is 25 times my yearly expenses enough to retire?

It is a common rule of thumb, not a promise. It assumes you pull about 4% from your savings in the first year and adjust for inflation after that. If you retire early, expect high medical costs or want a bigger cushion, many people use 28 to 33 times instead.

Should I count my mortgage in retirement expenses?

Only if it will still be there when you retire. If the house will be paid off, remove the mortgage payment but keep property tax, insurance and repairs, because those never go away.

Where do I find my Social Security estimate?

Create a free account at ssa.gov and open your Social Security Statement. It shows estimated monthly benefits at different claiming ages, based on your real work record.

Educational content, not personalized financial advice. Sources cited where applicable.