Determining the minimum amount of savings required to retire comfortably at 60 years old is a complex question that requires evaluating many variables. Many formulas are relied on to accurately calculate the nest egg needed for a 30-year retirement, which demands factoring in future healthcare costs, inflation, Social Security benefits, market risks, taxes, and more.
By breaking down the savings and spending levels needed for different phases of retirement and considering multiple scenarios. The financial analysis in this article aims to find a reasonable baseline target for retiring at 60.
While everyone’s complete retirement picture involves too many unknowns and individual choices to have a one-size-fits-all number, establishing a well-informed estimate gets us much closer to an adequate range of savings.
Going step by step through an example of a 60-year-old’s essential expenses, inflation forecasts, Social Security contributions, and potential market returns year-by-year, we quantify the minimum investment portfolio size required to fund a 30-year retirement aligned to one’s spending habits. However, as we explore, retirement readiness extends beyond the one nest egg figure calculation.
Based on common retirement math, the minimum amount needed to retire at 60 is:
$756,932
This is calculated by:
- If the annual income for expenses needed in retirement is $50,000.
- Using the 25x rule to get a base amount needed ($1.25 million)
- Calculating the required amount from ages 60-67 ($295,675)
- Factoring in inflation for ages 60-67 ($10,500)
- Calculating the amount needed from ages 67-100 ($461,257)
- Factoring in inflation for ages 67-100 ($60,878)
When adding up all those numbers, the final total is $756,932. This simplified calculation doesn’t consider taxes and market returns but gives a baseline minimum amount needed to retire at 60.[1]
The 25x Rule Gives Us A Starting Point.
The 25x rule is a common baseline financial planners use to estimate how much money is needed to retire comfortably. It states you should take your expected annual expenses in retirement and multiply that number by 25. So, for example, if you expect $50,000 in yearly retirement expenses, you would take $50,000 x 25 = $1,250,000. This gives you a preliminary target for the reasonable savings needed to last the duration of your full retirement.
However, the 25x rule alone has some gaps in practical retirement planning. First, it doesn’t consider additional income streams like Social Security or pensions that will offset some retirement spending needs. Second, it fails to consider inflation over what could be a 30+ year retirement. Lastly, it does not segment savings needs based on different phases of retirement (i.e., more active early years vs later years). Still, it gives us a valuable baseline to start our retirement calculation.
Calculating Retirement Needs From Ages 60-67
Since most retirement time horizons span 20-30 years or more, it’s crucial to break down savings needs during different phases—more active early retirement years compared to later years when less spending occurs.
In this case study, we’ll calculate retirement savings needs from Pre-Social Security at ages 60-67 and after Social Security claims begin at 67-100. From ages 60-67, we have $50,000 in expected annual expenses with no Social Security income yet. Using a future value calculator, accounting for a 6% return rate, this person would need $285,175 saved to fully fund those 60-67 retirement years with $0 left.
Factoring In Inflation From Ages 60-67
On top of the base retirement savings required, inflation makes calculating future spending requirements more complicated. Even at a modest 3% annual inflation rate, prices can nearly double over a 25-30 year retirement.
For ages 60-67, we calculate a 3% inflation rate on the $50,000 annual expenses. That comes out to $1,500 more dollars needed each year. Over the seven years from age 60 to 67, we are multiplying $1,500 x 7, totaling an extra $10,500 in savings required to keep pace with inflation. When we add that to the prior $285,175 savings needed, the new total becomes $295,675.
Calculating Retirement Needs From Ages 67-100
This retirement calculation factors savings needs out to age 100 for longevity risk protection. With Social Security kicking in at age 67, this person can expect $33,600 in annual Social Security payments. After Social Security’s monthly income, he needs $27,893 annually from retirement accounts to cover the remaining expenses.
Using the future value savings calculator again, accounting for a 6% return rate, retirement savings would need to equal $461,257 from ages 67-100 to fully fund those years with no money leftover by age 100. This translates to a monthly spending budget of $2,324 from retirement investment accounts after Social Security.
Accounting For Inflation
From ages 67 to 100 consider an additional 33 years from ages 67 to 100, continuing 3% annual inflation, which results in vastly higher cumulative price increases.
Starting expenses at age 67 are $61,493 after some inflation has already occurred from the prior period. A 3% annual inflation rate is $1,844 per year more needed. Over the 33 years between ages 67 and 100, $60,878 in extra retirement savings is required. Factoring this in, the total needed becomes $461,257 + $60,878 = $522,135.
Putting It All Together For The Total
Taking the key outputs from each retirement savings requirement above, we can calculate and add them up to find the minimum total amount needed to retire at age 60:
Ages 60-67: $295,675. Ages 67-100: $461,257
Total minimum retirement savings required = $295,675 + $461,257= $756,932
Why This Is A Simplified Calculation
While going through this exercise provides significantly more detail than relying solely on the 25x rule, calculating total minimum retirement savings still involves some key simplifications, like not accounting for significant healthcare expenses, taxes, portfolio risks, etc., that a comprehensive financial plan would incorporate.
Key Takeaways
- The 25x rule provides an initial benchmark but does not capture all the complexities of retirement planning.
- Splitting up retirement savings calculations by age segments provides more accurate projections.
- Inflation significantly increases the nest egg required over a 30-year horizon.
- Delaying Social Security until full retirement age allows those benefits to offset some retirement spending.
- Our simplified model results in nearly $800K required at a minimum to retire at 60
- A complete financial plan would incorporate taxes, risks, healthcare, and other significant expenses.
Conclusion
Determining retirement readiness is filled with assumptions and unknown variables that make definitively answering “how much is needed” relatively complex. By breaking down savings and spending requirements for different phases and considering worst-case health scenarios and market conditions, this analysis aims to establish a baseline nest egg target.
The precise savings tipping point between a comfortable and challenging retirement journey varies substantially based on individual lifestyle choices and luck. With a thoughtful approach, an openness to new information along the way, and expert guidance to optimize all the moving parts, the odds of a well-funded retirement future significantly improve. The journey of determining your “number” never ends as life’s chapters evolve.
This analysis serves as an essential starting point to motivate building sufficient savings. The next step is to work with a financial advisor to create a tactical plan explicitly optimized for your situation, accounting for all variables when asking, “What’s the minimum I need to retire at 60?”