# How to Calculate What You'll Need to Retire

How do you figure out exactly how much you need to retire? The easy part is coming up with a theoretical number to start with, which involves a lot of assumptions and estimates. The complicated part is how to estimate or assume for real life, which can trick us into thinking things will always be fine or terrible even though we have no idea what's going to happen. Still, if you can ignore "the unknowable," you can come up with a perfectly reasonable retirement number.

### Retirement Lifespan

Start by estimating how many years you will live in retirement. Look at the for someone of your age and gender and consider the ages at which your grandparents or parents may have passed away to get a sense of your own lifespan. Factor in what age you expect to retire. For example, if you hope to retire at 65 and you think you will live to 85, then you expect to live in retirement for about 20 years. You could live well past 85 or not, but at least you now have a goal to start with.

### Retirement Salary

The next thing you want to estimate is how much of today's income do you need to live on. In retirement, you may be able to cut expenses (finish raising the kids, downsize the house, or eliminate debt including the mortgage) and live leaner than you do now, or you may want the same standard of living you currently have. At a minimum, you should plan on needing 80% of your current income, but an even better rule of thumb is 85%.

Let's assume that Jaime currently earns \$50,000 per year. After creating a budget, she decides she could actually live on \$40,000, so she sets her retirement goal at 80% of her current income. She plans to retire at 70 and with her family history, she figures she will likely live to about 90. The simplest calculation is \$40,000 x 20 years = \$800,000. However, this is a complicated exercise.

What you really want is an amount that generates in annual interest the money you need to live on. In this case, the \$800,000 may actually work. If you had \$800,000 and invested so that you were earning 5% annual interest, your portfolio could pay \$40,000 a year without you having to touch the principal. Of course, market returns can be variable, so if you have a lower annual return assumption—say 3%—then you would need nearly \$1.4 million to generate \$40,000 per year. Taking into account inflation, taxes, or long years of poor performing markets can impact your assumptions.

Another factor that can impact your assumptions is Social Security. If you receive Social Security, that will help you meet monthly expenses. If Jamie needs \$3300 a month to live and Social Security pays \$1500 a month, her share is reduced to \$1800. Of course, Social Security itself is a complicated institution. If you are an optimist, you can go with that number as your hypothetical, or reduce to scale according to your level of expectation of receiving Social Security.

### Complications Can Derail Assumptions

Jamie may want to still shoot for a higher goal. Not just because she's skeptical she'll ever see a Social Security check or because she thinks taxes and inflation have no place to go but up, but also because she wants to plan for those unexpected expenses that could eat away at her retirement budget. Health care and health problems are the obvious example—one life-threatening illness could quickly wipe out a portion of her savings and the interest it pays. She can put money aside each month for long-term care insurance, which helps pay for in-home and facility nursing care, but there will be expenses that insurance does not cover.

A volatile stock market, sky-high income tax or capital gains rates and rampant inflation are other risks to your retirement income. But on the plus side, remember that retirees don't take all of their savings at once. Your money should continue to work for you, earning interest and dividends even as you start taking distributions.

You can use a retirement calculator like the Employee Benefit Research Institute's or the user-friendly  to see what is possible for you. You can find more information on other retirement calculators. With these types of retirement calculators, you can change your assumptions to change the result, but if you really want to make sure your estimate of how much money you will need to retire matches your goals, try completing a budget plan for retirement.

Creating a retirement number goal makes sense for some people, but for others, it's easier to contemplate saving say \$200 a month or 6% to 10% of your annual salary (saving 18% is the goal that the Center for Retirement Research recommends). Some financial experts recommend aiming to save at least 12 times your current salary. If you are just getting by financially, it's more important to save what you can than to aim for such an impossible number that you end up saving nothing.

The content on this site is provided for information and discussion purposes only. It is not intended to be professional financial advice and should not be the sole basis for your investment or tax planning decisions. Under no circumstances does this information represent a recommendation to buy or sell securities.