Retirement Planning: How Much Will I Need? So now that we’ve been through the important parts of the why, let’s investment for retirement options tackling the how of retirement planning by asking the No. 1 retirement question: «How much money do I need to retire?
The answer to this question contains some good news and some bad news. First, the bad news: There really is no single number that would guarantee everyone an adequate retirement. Our network of expert financial advisors field questions from our community. Are you a financial advisor? The latest markets news, real time quotes, financials and more. Retirement Planning: Why Plan For Retirement? Retirement Planning: Where Will My Money Come From?
Now for the good news: It’s definitely possible to determine a reasonable number for your own retirement needs. All it involves is answering a few questions and doing some number crunching. Provided you plan ahead and estimate on the conservative side, you should be able to accumulate a nest egg sufficient to last you through your retirement years. There are several key tasks you need to complete before you can determine what size of nest egg you’ll need to fund your retirement. Decide the age at which you want to retire. Decide the annual income you’ll need for your retirement years.
It may be wise to estimate on the high end for this number. Add the current market value of all your savings and investments. Again, estimate on the low end to be on the safe side. If you have a company pension plan, obtain an estimate of its value from your plan provider.
Estimate the value of your Social Security benefits. When drawing up your retirement plan, it’s simplest to express all your numbers in today’s dollars. Just remember not to mix the two. If you do, your numbers won’t make any sense! 300 in 2025 dollars each month to your retirement plan? Compute all of your numbers in today’s dollars.
When you are finished, you can apply an inflation assumption to get a realistic estimate of the dollar amounts you will be dealing with as you make your contributions over the decades. Now on to the sample calculation. John wants to retire at age 65. 100,000 in savings and investments. John does not have a company pension plan. Visiting the SSA website, we can quickly calculate John’s estimated social security benefits in today’s dollars. Assuming John is born on today’s date 40 years ago and will retire 25 years from now, we can retrieve his estimated Social Security benefits in today’s dollars.
Assuming John’s Social Security funds come through as estimated, we can subtract his estimated monthly benefits from his required monthly income amount. John is in good health and has a family history of longevity. He also wants to make sure he can pass along a sizable portion of wealth to his children. Of course, we haven’t accounted for the taxes John will pay on his investment income. Now, keep in mind all these numbers are expressed in today’s dollars. Since we’re talking about a time period spanning several decades, we’ll need to consider the effects of inflation.
As you continue with your retirement plan year after year, there are tools to help make simple calculations. Arriving at a target nest egg is a highly personalized question, the inflation assumption doesn’t really matter. Let’s start tackling the how of retirement planning by asking the No. Investment for retirement options yourselves these questions. Real time quotes — social Security benefits don’t come through, we have a really good relationship.
This is equal to 1. Either way, for the purposes of our retirement calculation, the inflation assumption doesn’t really matter. You don’t need to worry about this too much for your retirement plan, but just keep inflation in mind when you determine how much you want to save for your nest egg every month. 200 won’t buy you very much.
As you continue with your retirement plan year after year, simply check the inflation number each year and revise your contributions accordingly. Provided you do this, you should be able to grow your capital at your estimated real rate of return and reach your target nest egg. 500,000 target nest egg too small. Poor return on investments, increased taxes, unexpected medical expenses, or a reduction of Social Security benefits make John’s actual nest egg fall short of projections. Suppose that his Social Security benefits are discontinued.
850,000 in order to accomplish his retirement goal. A smaller nest egg might very well be sufficient to fund his retirement, but as we’ve already outlined, many uncertainties can derail his retirement plan along the way, so it’s best to err on the side of caution. The point here is that the original number we came up with for John’s nest egg is the bare minimum. When you do your calculations, start with the bare minimum and then try to provide yourself with a sufficient margin of safety by assuming worst-case scenarios, such as an unplanned long-term illness. Social Security benefits don’t come through, tax rates are higher than projected, etc.
Therefore, if you are planning to retire at 55, be sure to determine whether you will have access to the entire balance of your retirement savings at that time. Retiring Early: How Long Should You Wait? In our above example, John’s retirement plan included a significant amount of capital to be passed on to his heirs. You may wish to «die broke,» or you may wish to leave a large inheritance for your children or to give to a charity. Either way, these decisions can impact your financial plan considerably. On the flip side, it is becoming increasingly common for retirees to choose to work part-time during their retirement years. Some who choose to work during their retirement do so for personal-fulfillment reasons, others may do it for the extra income it provides.