How much money do I need to retire?
Experts say you’ll need 60% to 85% of your gross household income today to sustain the same lifestyle you have now after you retire. In theory, the higher your income today, the closer you are to the lower end of that scale. That’s probably true enough, but maybe you should look at the issue of determining your retirement income needs in the 21st century in a slightly different way.
You could make a list of assumptions about what your lifestyle and your living expenses will be after you retire or you can make an educated guess based on your current living expenses. But why bother, after all, retirement’s a long way off, and we have no real idea of what those expenses will be then.
Most of us won’t take the time to figure out how to work a complex process. You do, though, know what it costs to maintain your lifestyle today and you probably won’t be saving much more money or paying payroll taxes after you retire. If you take those two things out of the gross income you pay taxes on, you’ll have how much it might take to sustain your current lifestyle if you retired today.
Simply put, you want a retirement income that equals your net income today. Your net income is what you would need if you retired right now.
After that, you still have to decide how much money you need to live the way you want in retirement. You may want your retirement lifestyle to be different than it is now. Some folks can get by on much less than they use now, while others may decide they want more. It’s a personal choice for all of us. So, take a look at what you want to do after you retire and pick a number.
There’s some basic questions to answer:
How many years will you need that income? This is a major concern, after all, no one wants to out live their income after they retire. Will your income keep pace with inflation throughout those years? Will you have to draw down your starting retirement portfolio to support your income needs or just will you be able to live off the earnings without touching the principal?
There’s more to consider:
How about inflation? How much will your retirement income have to be after retirement after it has been adjusted for inflation and costs for things we need over the years have increased? What should that inflation rate be anyway? You could use a historical average or just make an educated guess.
If you can answer those questions, then you can determine how much money you need at retirement to support you for the rest of your life.
There are some pretty sophisticated calculations based on some assumptions that, if changed, could radically alter our results. Some of the calculations are hard to understand. What we really need is a simple way to give us an idea of what we need to do to get started. We can save the more esoteric efforts for later.
So forget about inflation for the moment. Ignore Social Security and any company pension you may get. Pretend your money gets no return now or after retirement. But do count all the money you’ve saved for retirement as of today.
How Much Do I Need To Retire?
That’s the question you need to answer. There’s a really simple way to find out how much you need to save. Here’s an example, let’s say your savings amounts to $20,000. And, let’s say you want an annual income of $40,000 in today’s dollars after you retire. That’s about what it takes to live comfortably today with little or no debt (based on my experience).
Then let’s assume you want to retire in 30 years and that you’ll live the average of 20 years after you retire. The goal is to not outlive your money.
The two questions you need to answer are: 1. How much money do you need to have at the start of your retirement to support yourself in your golden years? 2. How much do you need to have in savings each year between now and then to get there?
How Can I Calculate Retirement Income.
You need $40,000 a year for 20 years, so that comes to $800,000 that will be needed in the first year of retirement. You already have $20,000, so that means you’re only $780,000 short. Divide the shortage by the 30 years you have to save it up, and you discover you only have to cough up $26,000 every year between now and the time you retire to a life of leisure.
Too much is left out of this simple approach to provide a meaningful answer to the question at hand. Not many of us can afford to save $2000 bucks a month. Even worse, the answer makes the whole idea of saving for retirement seem impossible task, but this is far from true.
To do things right, you must take a cold, hard, objective look at your desired income, subject it to a rational choice of assumptions, and make some detailed calculations.
The best way to do retirement calculations is with one of the software packages available commercially and on some government websites. You can find many different retirement calculators online that can help.
The idea is to use realistic assumptions and expectations to plan your retirement. It’s your choice. How much you enjoy retirement depends on how you plan for it.
Get a copy of my new e-book, “Personal Retirement Planning” and find out how to calculate how much your retirement will cost. Edited from my first hand perspective and updated for 2017. It’s absolutely free.