May 11, 2017
Calculating Your Retirement Number
This video is about a simple exercise to estimate how much money you’ll want to have saved for retirement. It should provide you with enough info to answer the question of whether you’re on the right track or could benefit from making some adjustments.
Decide how much of your current income you’d want to replace once you’re no longer working. This will depend upon what lifestyle you expect. Most people want to have between 70 and 85% of their preretirement income.
For example, your current household income is $100,000 and you’d like to replace 80% of this in retirement. This first number would be $80,000
Adjust this number for inflation, the rising cost of living over time. We don’t know what this number will be, but 4% has been about average over time.
10 years away from retirement multiply the retirement income by an inflation factor of 1.48.
15 years away from retirement multiply by 1.8
20 years away from retirement multiply by 2.19
25 years away from retirement multiply by 2.67.
30 years away from retirement multiply by 3.25
For example, in Step 1, you decided that you want to live on an income of $80,000 per year (in today’s dollars) during retirement and you’re 25 years away from retirement.
$80,000 * 2.67 = $213,600
To maintain the lifestyle that an annual income of $80,000 provides today, you’ll need $213,600 per year in 25 years from now.
Add up your other sources of potential retirement income. You can get an estimate of your Social Security benefits at socialsecurity.gov. Most Americans no longer receive pensions, but if you’re eligible through your employer, you’ll want include this number here too.
Do step 2 for this number adjusting your projected retirement income for inflation. For example, if you are eligible to receive $20,000 per year from Social Security in today’s dollars and you are 25 years away from retirement, multiply $20,000 by 2.67 which is $53,400.
Now subtract your inflation-adjusted projected future Social Security and pension benefits from your inflation-adjusted target retirement income.
Inflation-Adjusted Target Retirement Income: $213,600 per year
Inflation-Adjusted Social Security Benefit: $53,400
Shortfall: $160,200 per year
This means you’ll need to create an investment portfolio that can produce $160,200 per year in income.
Multiply this number by 25. Where does 25 come from? It is derived from an estimate of what is normally a safe portfolio withdrawal rate of 4%.
For example: If you want $160,200 per year in future retirement income, you’ll need ($160,200 x 25 = $4,005,000) in your retirement portfolio, essentially a $4 million retirement portfolio to generate this income at a historically safe withdrawal rate.
This number is often a lot larger than we expect. Adjustments can be made with how much income you want to replace, how long until you retire, working part time in retirement, other financial changes that will occur over time. The earlier you realize what this estimate is, the longer you can take advantage of compounding of your investments, ultimately providing you with a better probability for success.