Figuring Out How Much You Need to Retire

This is a guestpost from Mindy Laughton.    Mindy is a journalism student in the Midwest. Upon graduation she hopes to write for multiple publications while traveling the world.

Every personal financial plan has retirement as a central and controlling component. This is understandable, as a significant portion of all our earnings – not to mention all our savings – is allocated for those years after we have finished work. Planning for retirement is thus a complicated process. We have to decide how much to put away every month, where to invest this money, what is a Roth IRA capable of doing for us, and the nature of the expenses we can reasonably anticipate down the road. Certainly, it’s a complicated process.

But many people spend so much time simply trying to save that they lose sight of the forest for the trees. They know they need a lot of money for retirement, but they don’t take the time to break down the numbers and consider exactly how much they’ll need. Whether you’re a young employee just starting to save or an older Boomer contemplating the end of your career, now is the time to take a few minutes and figure out a rough assessment of your retirement expenses.

The rule of thumb is that a retiree will need 70% of their annual career income in order to retire comfortably. This means that, if you made $100,000 per year in your middle age and during your peak earning potential, you ideally will retire with $70,000 saved for every additional year that you plan to live. But this convention does not apply to everybody. Some people spend more in retirement than they did while working. On the other hand, some spend far less.

So the first step is to determine if you fall above or below this 70% figure. The best way to assess this is by looking at those categories where retiree expenditures are far lower than expenditures for working adults. These categories include housing, entertainment, and transportation. If you expect that your costs in these categories will decline dramatically with retirement (ie you are moving to a cheaper area and plan to rarely travel), you may well not need to have 70% of your previous income on hand. If, however, you plan to travel extensively, host guests frequently, and/or move to a high-priced condo in the city, it’s quite possible that your expenses in these three categories will meet or even exceed the similar costs incurred during your career. In this case the 70% figure may be far too low for your expected lifestyle.

The next step is to revisit your other sources of income and begin crunching the numbers to see how much they will add up to. At this point, you must take an overview of your situation and start asking yourself some hard-hitting questions. For example, in addition to your salary, how much money will you be drawing from social security? If you have an IRA or a private pension plan, how much can you expect to draw from this? Look at your investments too. Do you have money tied up in the stock market, or in bonds? Decide how much you will need to take from these investments and how long you can leave the rest of it to accumulate interest. It's also important to remember that your annuities won't be protected from inflation.

Finally, the last step is to determine your obligations and liabilities in your retirement years. When we are younger and still working, our numerous obligations likely include a substantial one to our children. Raising children is expensive, and this is usually a liability that dissipates before the retirement years. But other obligations may emerge at the same time. Mortgage payments, financial support to relatives, and the health of you and your spouse should all come into this consideration.

On a broad level, these are the three steps that you should follow when trying to figure out how much you need to save for retirement. While predicting your retirement expenses and needs can be a tricky business, it’s impossible to execute a plan properly if you don’t have some conception of the big picture.


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