Many people wonder just how much money they actually need to retire. In fact, it’s actually one of the most common questions people ask in regards to retirement.

However, it may not be the easiest question to answer, as there are so many variables—many of which are unknown.

You can begin to grasp how much you will need to retire, though, by considering the following questions.

What Do Financial Experts Recommend?

Because the exact amount of retirement money that you will need varies according to your unique financial situation, there isn't one answer that will work for everyone. Instead, many financial experts offer a variety of different guidelines.

If you search the Internet for answers to the question of how much money do I need to retire, you might find advice that alludes to a certain percentage of your pre-retirement income a year before you retire (usually about 80%) or a figure that is 10 or 12 times your pre-retirement salary. Or you may find a ballpark number like $1 million. Or, you might work backwards using the 4% rule. Or, you might have read our guide to FIRE.

As you can see, there are a wide variety of opinions, which speaks more to the fact that there isn't an easy answer to this question that will work for everyone.

‘How Much Money Do I Need?’ Is Actually The Wrong Question

When you retire, it really doesn't matter how much money you have in the bank.

What matters is how much income (usually measured as monthly income) your assets can produce. There are two main categories for generating income in retirement: investment income and passive income.

Investment Income in Retirement

The first way to generate income in retirement is money from any investments that you have. This could be money from a taxable investment account, or maybe a retirement account like an IRA. You take a certain percentage of your assets out of your account each year to live on (known as the withdrawal rate).

There is different advice on what is a safe withdrawal rate, depending on how aggressive you want to be. If you want to live on $40,000 a year, with a 4% withdrawal rate you will need $1,000,000. If you use a more conservative 3.3% withdrawal rate, you'll need $1,212,121. As you can see, your choice of a withdrawal rate that works for you can have a big impact on how much money you need for retirement.

Passive Income in Retirement

Another source of income in retirement is passive income generated from different assets, investments and activities. One of the most common passive income sources in retirement is real estate, usually rental income, but there are many ways to generate passive income. Dividend stocks, income from a blog or royalties from a published book are all ways to generate passive income. Every dollar that you earn each month from passive income is one dollar less that your investments need to generate.

What Are Your Current Expenses?

In figuring out what you need for your retirement, consider your current expenses. Once you have an idea, use it to get a ballpark idea for what your expenses might be in retirement. To start, look at the past three months of spending. Check your:

• Bank accounts
• Credit card statements
• Cash spending

Your expenses in retirement will be different from your current expenses. Here are a few areas where you may need to adjust your forecast:

Which Debts Will Be Paid Off?

It’s ideal to retire without any debt, but many times, people still have some once they retire. Keep in mind which of your debts will be paid off before your retirement, such as:

• Credit cards
• Mortgage
• Consumer loans
• Student loans
• Car loans

What Will Your Housing Expenses Be?

Your housing expenses may change greatly by the time you’re ready for retirement. For example, you may have your mortgage paid off before you retire or you may decide to downsize to a smaller home or move to an apartment.

You also might consider a reverse mortgage or move to a place with a lower cost of living. Some people in retirement even decide to rent out a spare bedroom in their home for extra income.

Which Insurance Policies Can Be Dropped?

You may be able to drop insurance policies once you’ve retired, including disability insurance, as they won’t be necessary anymore.

Also reconsider keeping, dropping, or revising your life insurance plan. Remember, for most people, life insurance was needed while raising a family. In retirement, your children are most likely self-sufficient adults, which can reduce or eliminate your need for life insurance.

What Will You Do For Health Care?

As you get older, most people's health care expenses go up. Even if you qualify for Medicare, you may need additional money for copays, prescription coverage, or additional insurance.

If you have invested in your HSA, you may already have money set aside specifically for health care expenses. If not, you may need to make sure that you have additional money for health care, prescription, or long-term care insurance.

Will You Spend More or Less Money Traveling?

Consider how much you plan on traveling during your retirement, as many people spend a great amount of their retirement leisurely traveling, or even enjoying a semi-permanent vacation overseas by staying in a favorite spot for some time. For road trips, factor in gas and other expenses associated with car travel.

A life in retirement means you should also think about no longer needing to commute to the office, which means your gas expenses may be lower.

The Bottom Line

It is not the total amount of money that you need to have in order to retire, but the amount of monthly income your assets and investments generate. The two main sources of retirement income are investment income and passive income.

Once your projected monthly retirement income exceeds your projected monthly expenses, you have "enough" money to retire. Also, your finances and expenses may likely change in retirement. It's wise to make sure you have a bit of cushion because you don't want to have to UN-retire due to running out of money.