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How Much Do I Need to Retire?

MONEY TALKS - Friends and family often ask me how much savings they need in order to retire. While I am more than happy to talk in generalities, I try to steer away from giving any specifics when I don’t have all the facts. Without a complete view of their financial picture, it would not only be impossible but irresponsible of me to answer their questions.

Unfortunately, more often than not, before I have a chance to respond, they hastily begin shouting out numbers. “Do I need ½ million? 1 million?” Typically this leads to me awkwardly trying to explain that the solution isn’t that simple and ethically I really shouldn’t answer their question. This response is usually met with a bewildered look and the inevitable “So you’re saying that’s not enough?” (Heavy sigh) At this point I coyly suggest that if they really want to know the answer they should become a client.

In an effort to provide friends and family with some guidance (and to quell the family banter), I have devised a quick back of the envelop calculation to give you a ballpark estimate of how much savings you need to retire. The calculation is rather easy to complete but does require some preliminary information before you can get started. I have included here a list of the necessary data as well as a simple worksheet that will walk you through this back of the envelope approach. Please bear in mind that this is a rudimentary calculation that won’t give you an exact figure, but it can be used as a reality check to see if you are on target to retire comfortably.

Here’s what you will need:

  • Pay statement                                                                                                               
  • Federal and state tax returns                                                                                
  • Social Security statement
  • Pension statement
  • Estimate of any other income you may receive in retirement.

In order to help illustrate the underlying methodology let’s consider the following scenario:

  • Jack (60) and Diane (58) are married with four kids. Jack, an engineer by trade, is the primary wage earner with a gross salary of $150,000 per year. Diane works as teacher earning $50,000 per year. Jack’s net take home pay is $3,750 and Diane’s net take home pay is $1,250.                                                                           
  • They both get paid twice per month, for a total of 24 times per year.                                                                                                                                                              
  • Last year they paid $18,400 in Federal taxes and $6,600 in state taxes.                                                                                                                                                        
  • Neither Jack nor Diane are eligible for medical benefits through their employer after they retire. When eligible, they plan to go on Medicare and purchase a supplemental Medigap policy.                                                                                                                                                                                                                 
  • Jack is eligible for Social Security and expects his annual benefit at full retirement age to be about $43,000. Diane earnings as a teacher do not qualify for Social Security benefits; however, through her teachers union, she is entitled to a pension benefit of $40,000 per year. Neither plan to seek part-time employment in retirement.                                                                                                                                                                                                                                                        
  • Jack and Diane both plan to work until their mid-sixties. They live a healthy lifestyle and plan to live well into their nineties.

Now let’s work through the numbers:

Based on the chart above, Jack and Diane would need about $1.5 million in order to retire. 

While I hope that you find the above exercise helpful, please keep in mind that is a static calculation which doesn’t take into account life changes that may occur in retirement. To get a more precise calculation or recommendation, I would encourage you to reach out to a qualified financial advisor.

*Multiplier is based on a success rate of 90% or more for a 15, 30, and 45 year portfolio. The calculations were completed by William P. Bengen, CFP® and can be found is his book Conserving Client Portfolios During Retirement.

** Note: the Savings Required field is not specific in nature and does not take into account your individual facts and circumstances. Accordingly, this should not be relied upon when determining how much money you need to retire, nor does it substitute for any legal, financial, tax, or accounting advice.