A typical retired couple in the U.S. may need over $1 million in savings for a comfortable retirement, but the exact amount depends on state, spending habits, and whether annuity income is used to offset the gap left by Social Security
For many Americans approaching retirement, the question of how much to save is anything but straightforward. While the national average suggests a retired couple needs about $1.16 million in savings to maintain a comfortable lifestyle, the actual figure varies widely depending on where you live, your spending patterns, and whether you use annuities to supplement Social Security. According to Investopedia's analysis of federal data, these differences can mean a gap of more than $500,000 between the least and most expensive states.
Retirement planning is further complicated by the role of annuities-insurance products that provide a steady stream of income in exchange for an upfront payment. For couples willing to convert a portion of their savings into an annuity, the amount they need to keep invested can drop significantly. But this strategy comes with trade-offs, including the need to spend down principal and the complexity of annuity contracts.
How Social Security and Spending Gaps Interact
Federal data shows that a typical retired couple spends about $84,000 annually, a figure that includes discretionary expenses like travel and dining out. Social Security provides an average of $37,700 per year for two people, covering roughly 45% of that spending. That leaves a gap of about $46,000 to be filled by withdrawals from savings, annuity income, or other sources. Using the 4% rule-a common guideline that suggests retirees can withdraw 4% of their portfolio each year, adjusted for inflation-filling this gap requires a nest egg of approximately $1.16 million.
However, this national average masks significant regional differences. In lower-cost states, annual spending for a couple can be as low as $70,000, while in high-cost states it can exceed $90,000. This means the required nest egg can range from about $800,000 in North Dakota to nearly $1.33 million in New Jersey. The gap between Social Security and total spending is the key driver of how much additional savings are needed.
Annuities as a Tool to Reduce Required Savings
Annuities can help close the retirement income gap by providing guaranteed monthly payments, which reduce the amount retirees need to withdraw from their investment portfolios. For example, every $500 per month in annuity income replaces $6,000 in annual portfolio withdrawals, lowering the required nest egg by $150,000 under the 4% rule. With $1,000 per month in annuity income, the required invested balance drops to about $858,650, and with $2,500 per month, it falls to just over $400,000.
It's important to note that these calculations only reflect the amount that must remain invested after purchasing the annuity. The lump sum used to buy the annuity is not included in the remaining nest egg calculation. For instance, if a couple starts with $800,000 and uses $200,000 to buy an annuity, they would have $600,000 left invested, plus the annuity's monthly income. The suitability of this approach depends on factors like age, interest rates, payout options, and contract features such as survivor benefits and inflation protection.
While annuities can reduce the need for a large investment portfolio, they are not a universal solution. Contracts can be complex, fees and restrictions vary, and the decision to annuitize is often irreversible. Consulting a qualified financial professional is recommended before making such a commitment.
State-by-State Differences in Retirement Needs
Where you retire remains a major factor in how much you need to save. Without annuity income, the required nest egg ranges from about $800,000 in North Dakota to nearly $1.33 million in New Jersey, according to Investopedia's model. Annuity income reduces the required invested balance by the same dollar amount in every state, but the starting point varies. For example, with $1,000 per month in annuity income, a couple would still need about $1.03 million invested in New Jersey and Hawaii, compared to about $500,000 in North Dakota and $507,000 in Arkansas. At $2,500 per month, the remaining nest egg ranges from about $50,000 in North Dakota to nearly $579,000 in New Jersey.
These figures are based on 2024 federal data on housing, consumer spending, and regional price differences. Investopedia calculated costs for a single retiree in each state, adjusted for a two-person household, and defined a comfortable retirement as average spending that includes discretionary expenses. From each state's estimated annual cost, they subtracted about $37,700 in combined Social Security benefits and any modeled annuity income, then divided the remaining gap by 4% to estimate the required nest egg. The results exclude the lump sum used to buy the annuity.
For context, a recent analysis found that roughly 40% of Gen X households have no retirement savings at all, and those who do often fall short of recommended targets-a trend that raises concerns as this group nears retirement age. For more on generational retirement savings gaps, see this in-depth look at Gen X's retirement preparedness.
Understanding the Trade-Offs of Annuities
Deciding whether to use an annuity to supplement retirement income involves weighing several factors. Annuities can provide peace of mind by guaranteeing a steady income stream, but they require giving up access to a portion of your savings and may come with fees, restrictions, and limited flexibility. The right choice depends on your risk tolerance, health, family situation, and retirement goals.
It's also important to understand that annuities are not designed to reduce the overall cost of retirement, but rather to change the mix of income sources and the amount you need to keep invested. The decision to annuitize is often irreversible, so reviewing contract terms and consulting a financial professional is essential.
Retirement planning is rarely one-size-fits-all. The 4% rule is a useful starting point, but actual withdrawal rates may need to be adjusted for market conditions, longevity, and personal circumstances. Annuities can play a role in managing longevity risk-the chance that you outlive your savings-but they are just one tool among many. Understanding the mechanics of annuities, including payout options, inflation adjustments, and survivor benefits, can help retirees make informed decisions about how to structure their income in retirement.
