How much is enough to retire in America: $500K, $1M or even more? Understand how big your nest egg needs to be

Just how much retirement savings do Americans need? It's more complicated than you'd think.

While Northwestern Mutual's 2024 Planning & Progress Study reveals the average U.S. adult believes they'll need $1.46 million to retire comfortably, some experts suggest saving 10 times your annual income. With 2024 Bureau of Labor Statistics data showing a median salary of around $65,200 among workers aged 55 to 64, that could mean a nest egg of $652,000 would be sufficient.

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So, what is the magic number and why is it so hard to calculate?

Ultimately, the biggest challenge is that no two retirees are the same. Someone with significant health issues or who wants to travel the world has different needs and desires than a healthy senior who just wants to garden outside their paid-off house.

Since you do need a number to set retirement savings goals, here are some steps to find your personalized answer.

Estimate your future expenses

You can't set a savings goal unless you know how much you intend to spend. So, start by considering future expenses to estimate, and don't overlook these big costs:

• Health care: The average 65-year-old couple in 2024 will need $315,000 over their retirement to cover out-of-pocket care expenses, according to Fidelity. This doesn't include long-term care.

• Taxes: Around half of all retirees may be subject to taxes on Social Security benefits, according to the Senior Citizens League. The income limit before Social Security benefits become taxable isn't indexed to inflation so more retirees owe each year.

You'll also need money for essentials such as food and housing, and may want to leave room for fun purchases. Take all these costs into account to calculate the income you'll need to live the way you want while living within your means.

Add up all possible income sources

The next step is to identify all potential sources of income coming in. For many people, these include:

• Social Security: Benefits are guaranteed to last for life. You can start as early as 62, although claiming any time before 70 will mean reducing your benefit.

• Savings: This is money you'll get from your 401(k), IRA and other savings vehicles.

While it would be nice to cover all your costs with Social Security, that's not realistic. Retirement benefits on average replace about 40% of your pre-retirement earnings, according to the Social Security Administration. The rest of your money must come from elsewhere.

Some people may have other income sources, including investments or even a pension. If you're likely to have funds from these other sources, add them to your list when estimating potential future income.

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Plan for savings to cover the shortfall

Consider the gap between your financial needs and the income you'll have available.

If you determine you'll need around $60,000 to live comfortably and Social Security provides $26,000, you'll need another $34,000 from other sources. If you don't foresee any windfalls on the way, such as an inheritance, it will have to come from existing sources.

Set your savings goal

Finally, the last step is to calculate how big your nest egg must be. There's a simple way to do that. If you plan to follow the 4% rule, for example, multiply the income you need your savings to produce by 25.

The 4% rule is a longstanding guideline suggesting you won't drain your retirement account if you withdraw 4% of your balance the first year and make annual adjustments based on inflation. While there are other techniques for setting safe withdrawal rates, this approach is widely used.

If you need your savings to provide $34,000 in income, multiplying this amount by 25 shows you should have $850,000 in retirement savings.

Once you've done this calculation, the only thing left to do is to set up contributions to your 401(k) or IRA and start working on building the nest egg you personally need for your dream retirement.

Better yet, if you still don't feel confident about the numbers, get in touch with a financial adviser to help you navigate the retirement waters.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.