Feb 08 2012

How much money will you need to retire?




 width=In my last post, we dreamed big and pondered how we want to spend our retirement. Today, let’s figure out how much this lifestyle will cost us. For many of you (especially if you’re younger) you’ll probably find you’re aiming to be a millionaire in retirement. Don’t be intimidated. This post is going to involve some number-crunching. Take your time.

In this post, I’ll help you…

  • Create your ballpark retirement budget in today’s dollars
  • Determine how much you’ll get from Social Security and pensions
  • Convert it all to inflated dollars
  • Figure out how much money you’ll need in your retirement accounts, total, to meet your goal

Some retirement calculators assume you’ll need a certain percentage of your income in retirement (some suggest 80% ). That calculation is flawed.

Say you’re fresh out of college and are earning $35,000/year. If you used the 80% rule, it would suggest you’ll need $28,000/year to live on in retirement. Ten years into the workforce, say you’re earning $75,000. The 80% rule would suggest you’d need $60,000/year in retirement. So, which is it?

Possibly neither. Your present income cannot reflect future expenses.

Here’s my retirement expenses in today’s dollars:

  • Housing: Property tax, insurance, HOA, maintenance: $350/month (I’m assuming there is no mortgage)
  • Electric: $100
  • Gas: $100
  • TV/internet: (wow, what will those things look like in 30+ years?): $40
  • Phone: $65
  • Water/sewer: $40 (I’m reducing this because a house of 2 people will have a lower bill than 2 adults + 2 kids)
  • Groceries: $350/month (Smaller because again, two adults and no kids)
  • Gasoline: $150
  • Clothing/shoes: $40
  • Restaurants: $200
  • Entertainment: $200
  • Gifts: $100
  • Car insurance: $50
  • Car maintenance: $50
  • Car (we’ll want to pay cash for any car in retirement. The money will just need to stay invested until we need it. I’ll assume a $15k car, purchased every 7 years, though I think we’ll be able to do better than that. That gives me $200/month)
  • Travel: $12k/year or $1k/month (Big spending here!)
  • Long-term care insurance: $400/month? I don’t know about this one. We wouldn’t buy a LTC policy until our late 40s at the earliest, but possibly we’d wait until our 50s. If our nest egg is big enough, perhaps we can afford to self-insure. Still, I want to account for this figure in case we’ll need it.
  • Total: $3,435/month or $41,220/year
  • Add a 10% buffer for miscellany = $45,342/year

Note that we will not have life insurance policies anymore. We will not be saving for retirement anymore (obviously!) so that’s one fewer expense. I do not have health care listed here. I have NO idea how to predict this one. I’m speculating we’ll use our Social Security money to pay for our insurance to go beyond what Medicare will do. With the state of health insurance changing so much right now, I just don’t know how to predict it this far out. Perhaps that’s where my 10% buffer can come into play.

What am I missing? Taxes, for one. Some of our investments are in Roth (growing tax-free).

Next, calculate how much you’ll have in pension and Social Security benefits. 

If you will have a pension, find out how much you’ll get, when you’ll be eligible to receive it, and if it will be adjusted to inflation.Your HR person should have this info for you.

The same goes for Social Security, though it’s debatable how much will be available to me in 36+ years. If you have a long time before you’re eligible for Social Security, you might reduce the calculated benefit in your own calculations, just in case.

Visit the Social Security calculator to determine your expected benefit. I had to use this social security calculator because Shane and I haven’t been in the workforce for 10 years yet. Do “today’s dollars” instead of inflated. We’ll factor in inflation in a minute; right now let’s get all our figures in today’s dollars.

The Social Security calculator estimates we’ll get roughly $1,600/month ($19,200/year) if we started drawing benefits at age 62. If we wait until age 65, it estimates about $2,200 ($26,400/year). Wait until age 70, then $2,800/month or $33,600/year. Again, these figures are only my estimates, and in today’s dollars.

Your total projected annual expenses – Pension – Social Security = Nest Egg (amount needed in your investment accounts)

So. Let’s plug in my numbers.

$45,000 projected annual expenses – $0 pension – $19,200 Social Security = $25,800/year my investment account will need to fund me if we retire at age 62

$45k – $33,600 Social Security at age 70 = $11,400/year my investments will need to cover if we retire at age 70 and wait to draw benefits then

Following my math here? Do you see how to plug in your own figures? If not, let me know and I can help.

Now, we’re going to calculate all of this in inflated dollars to determine our ballpark target for our investments. It is important to consider inflation, because that reflects the true target amount in our retirement nest egg that we’ll want to hit before we retire. If we translate that to today’s dollars, it can help us conceptualize it — but the INFLATED figure is what we’re after — the inflated figure is our actual savings goal.


Inflation Calculator
Amount Today ($):
Inflation Rate:
Number of Years:
Amount In the Future With Same Buying Power


Assuming a 3% annual inflation rate, in 35 years when I am 62, $45k in expenses will be $130k in the year 2047. Assuming 3.5% inflation, that’s $155k/year in expenses.

Subtract out my estimated Social Security benefit at age 62 and plug in $25,800 needed per year into that inflation calculator. That becomes about $75k needed to come from my investments per year. With me still?

How much will I need total in my investment accounts?

We can use the “rule of 4” to determine how much we’ll need in our nest egg. The rule of 4 suggests that if you have a big pot of money (i.e. your investment porfolio) you can withdraw up to 4% of the total balance each year, and you should have enough money to do that for roughly 30 years. If your investments do well or if you withdraw slightly less than that 4% (especially in the first few years!) then in theory you’ll never run out of money.

Related: A smarter approach to the 4% rule at US News for how the rule works, and adjustments you can make in retirement if needed.

Taking $75k/year and multiplying that by 25, I get $1.875M needed in my investment accounts at retirement (this is inflated dollars).

If I want to be conservative and assume I will get NO Social Security benefit, I’ll run this calculation:

$45k/year expenses at 3% inflation for 36 years = $130k/year

$130k x 25 = $3.25M needed in my investment accounts

Action steps for you:

  1. Create your hypothetical expenses for when you are retired. Calculate it in today’s dollars.
  2. Determine how much your pension benefit will be, if any
  3. Determine how much your Social Security benefit will be
  4. Calculate how much money your investments will need to cover ( EXPENSES – PENSION – SOCIAL SECURITY = NEST EGG)
  5. Plug your nest egg into the inflation calculator. Try assuming different rates of inflation. The “number of years” is the number of years until you expect to retire, and this figure can change (say you want to calculate your needs for retiring at age 59, or 62, or 65, etc.)
  6. Take your inflated nest egg, and multiply that figure by 25. This is a ballpark estimate of how much money you’ll need in your retirement account.

Run a few scenarios. Assume different annual budgets (for instance, I can reduce my travel expenses for some years to conserve money). Assume different rates of inflation, and different Social Security and pension benefits. Assume different ages of retirement (age 59 vs. 62 vs. 65 vs. 70 can create BIG differences). Assume different life expectancies. Create a range of investment targets.

It’s impossible to determine the exact dollar amount we’ll need to save, but we CAN make educated estimates and get us in the ballpark. Now that we know roughly how much money we’ll need to save, we’ll be able to know how much we’ll need to invest with each paycheck to hit our goal.
Whew! You made it to the end of this megapost! What did you discover?
[This post is a part of my Retirement Guide series]

Posted under Uncategorized | 14 Comments »

14 Responses to “How much money will you need to retire?”

  1. I need around $4 million when I retire, such a scary number!

  2. Wow, it’s crazy how small that yearly income number is compared to what you need to save! $45k per year seems like such a low number considering all the travel and other stuff you want to do, and yet it adds up to $2 million total in the bank! Sheesh. This stuff really can be intimidating, but the earlier we start, the more manageable it will be, I guess.

  3. Wow, I never really thought about plugging in all the numbers like that. I will give it a try but am scared at the figure that I will see. It’s makes me happy knowing that we are doing what we can now to offset that huge number for the future. Great Post.

  4. It’s probably going to be a big number, but it’s better to know it now and start preparing than being unable to retire when you want to!

    Even though I’m aiming to hit probably $2M, I think it’ll be doable thanks to compound interest and starting early. Stick with it! :)

  5. Whale post alert! ha ha

    I decided that if I can save $4million and get 5% annual interest I can live on $200k per year and give my kids a nice inheritance. That is my dream number.

  6. One of your biggest assumptions is that there will be no mortgage payment or rent payment. How many people will be able to say that?
    In the whole “should I buy or rent” argument, I’ve never seen anyone address this on the “you should rent” side of the argument.

  7. Brian — I’m assuming I won’t have a mortgage, because I have a 30-year loan and I won’t retire for at least 33 years. We’ll probably pay it off early and even if we move to another house, we’ll aim to have a mortgage that is paid off before retirement. I know not everyone expects to be in that boat.

    As far as renting in retirement, it is a good option if rents are affordable in your city. I lived in an apartment complex in Pittsburgh where there were a number of retirees who were long-time renters. Some were there 20 years!

    I think the strongest reason many people argue that buying is better in retirement instead of renting is because you won’t have to worry about rent increases.

  8. Being able to take a mortgage out of the equation is huge. That said I don’t see why it couldn’t be assumed whether it’s part of a retirees budget or not. The payment period is fixed at 15 or 30 years at least that is a reliable assumption. The only variable is whether that person regularly upgrades their home for something more expensive and extending the payment period in the process. Not very responsible from a retirement perspective.

  9. Very good analysis and post. You calculation is very similar to mine. I am thinking of a number in the $3.4M range myself. I will continue to fine tune as I get closer to retirement in 2020.

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Hey! I'm Kacie, wife and mother of 3. I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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