How much do I need to retire?

“How much do I need to retire?” is a consistent question with pre-retires.  It is an important question and should be addressed.  For people like myself who occasionally eat too much, more is not always a good idea. However, when saving for retirement, more is always better than less.  But for most individuals and households, simply planning for a retirement that maintains current lifestyle is a challenge

Professional financial planners can provide very detailed and comprehensive retirement analysis and this can be very valuable.  The following is a very simple analysis which I used for myself and I believe can provide a reasonable ball park answer to the question.

  • Start with the current gross income before taxes.  The assumption is if an individual or household can live on a specified amount of income before retirement, then is reasonable to assume they can live on the same income after retirement. 
  • From this income, subtract annual savings for retirement including retirement plan contributions and long term after tax savings.  [Do not include employer matches or contributions.] Once retirement takes place, saving for retirement is no longer necessary. 
  • Do not deduct state and federal income taxes as retirees still pay income taxes after retirement. [Note:  State and federal income taxes may be less after retirement depending on actual sources of retirement income and quality of tax planning.] 
  • Subtract social security taxes paid on earned income, unless the retiree is counting on long term employment as part of the overall retirement plan.  If long term employment is part of the long-term retirement plan, then add back in estimated employee social security taxes after retirement. 
  • Subtract any debt payments which will be paid off by retirement.  Do not subtract any debt, mortgage [principal and interest only], car loans, consumer debt, which will continue after retirement. 
  • The resulting number is what I call the Retirement Income Objective [RIO]. 
  • From the Retirement Income Objective, subtract fixed sources of income at retirement such as social security benefits, pensions, and net income after expenses from long term rental property.  The remaining number, is the income need to come from savings and investments on an annual basis.  Let’s call this Annual Income from Retirement Portfolio.
  • Adjust for the estimated actual cost of health care.  Actual cost is the total amount spent on health care including deductibles, co-insurance, expenses not covered by insurance which often include dental and vision.  If, for example, the amount of this expense during working years is $5,000 and there is no change in the amount after retirement, no adjustment is necessary.  However, if there is either an expected increase to $10,000, then it is important to add $5,000 [$10,000 of expected costs minus current expenses of $5,000] to the Retirement Income Objective.  If savings are expected after retirement which is not normal but possible, the adjustment would be to subtract from the Retirement Income Objective.  
  • Now divide the Annual Income from Retirement Portfolio by 5%.  The resulting number provides a good estimate as to the minimum amount in the retirement portfolio at retirement.
    • Why divided by 5%.  See article on 5% Rate of Withdrawal under Post-Retirement.

Calculation Example

$100,000 – Gross Income

  • $  10,000 – Deduction for annual contributions to retirement savings.
  • $   7,650 – Deduction for annual social security taxes paid on earned income.  [This example assumes no employment after retirement.]
  • $  10,000 – Deduction for annual amount paid on loans which will be retired before retirement.
  • $           0

$  72,740 – Retirement Income Objective

$1,454,800 - $72,7400 divided by 5%.

The objective of this simple analysis is to give a reasonable estimate as to the amount of retirement assets needed at retirement.  The base premise is an individual or couple can live on a stated income prior to retirement, they should be able to live on the same amount after retirement.  There are many factors to be considered at retirement which are addressed in Post-Retirement article “Will my money last throughout retirement? 

Again, a professional financial planner with credentials can provide a detailed long-term retirement analysis which can be both beneficial and important, especially as retirees get closer to retirement. However, I would suggest the above simple analysis provides a reasonable estimate  for addressing the question “How do I need to retire?”

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.