Do You Have Enough to Retire?

5 Easy Steps to Determine How Much You Need Annually to Retire

Retired couple taking a walk, happy that they have enough to retire.
Knowing you have enough to retire brings peace of mind. Siri Stafford/Digital Vision/Getty Images

Are you saving enough to retire comfortably? If you really want to know, you'll need to do some personal calculations based on when you want to retire, and how much you want to spend while in retirement.

To get a rough estimate walk through the five steps below and in five minutes you can come up with a simple yes or no answer. 

5 Step Calculation

Here is an overview of a simple five-step calculation you can use to determine if you'll have enough income and savings to cover your expenses in retirement.

  1. What are your total annual contributions to retirement savings?
  2. Multiply that number by the number of years left until retirement (the "when you want to retire" part).
  3. Add your current retirement savings to that number.
  4. Divide by the number of years you expect to live in retirement.
  5. Add that to other guaranteed sources of income.

When you are done with the calculation compare the answer to your current annual expenses to see if the amount you projected to have is enough to cover the living expenses you normally have.

Example Using the Enough to Retire Calculation

We're going to walk through the five-step calculation for a sample couple. Here are the facts:

  • Couple, age 55.
  • Each contribute the maximum amount to their IRA account every year, for a total of $13,000 of IRA contributions each year ($6,500 each).
  • Have $150,000 saved already.
  • They would like to retire at their full retirement age as defined by Social Security, which in their case would be age 66 and 2 months, but we’ll call it age 67.
  • Based on output from a few life expectancy calculators, they expect at least one of them to live to age 94 so they expect to have 27 years in retirement.
  • He will have $2,200 per month ($26,400 per year) in Social Security benefits, and she will collect half of this amount ($13,200 per year) as a spousal benefit.

    Using their data, this is how the enough to retire calculation works:

    1. $13,000 (This is their total annual contributions to retirement savings.)
    2. $13,000 x 12 = $156,000 (Their total annual retirement savings multiplied by years left until retirement.)
    3. $156,000 + $150,000 = $306,000 (the total expected future retirement savings added to existing savings.)
    4. $306,000 / 27 = $11,333 (Total future and existing savings divided by number of years you expect to live in retirement.)
    5. $11,333 + $26,400 + $13,200 = $50,933 (Annual expected retirement income from savings added to other sources of guaranteed income; in their case Social Security.)

    In this case, the $50,933 represents their annual expected retirement income. They need to compare this to their expenses to see if it will be enough. If you aren't sure what your expenses will be in retirement make a retirement expense projection to come up with an estimate. 

    *This enough to retire calculation comes from Michael J. Zwecher's book entitled Retirement Portfolios, Theory, Construction and Management.

    This calculation is sufficient assuming both spouses are alive but upon the death of the first spouse the lower Social Security amount (hers' in this case) will go away and the higher amount will continue as a widow/widower benefit. However, certain expenses are also likely to go down upon the death of a spouse, such as health care and insurance costs, transportation and utilities. 

    Objections to This Type of Retirement Calculation

    Some will object that this simple enough-to-retire calculation does not take into account the growth rate on investments, or inflation. For the sake of simplicity, assume a growth rate on safe assets is 3%, and inflation is 3%. Those two variables would then cancel each other out.

    It is impossible to accurately predict all of the variables that will affect one's retirement income plan over a thirty-year time horizon. More detailed planning is useful, but this simple enough-to-retire calculation above offers a great starting place. 

    What if You Don't Have Enough?

    Some people don't want to do any calculating because they are afraid of the answer. This is the ostrich approach. Don't do this! It is far less stressful to do the math, face reality, and figure out an action plan, than it is to get to retirement and come up short.

    If you run through the calculations above and think you don't have enough to retire you can explore many options such as working a bit longer, finding ways to earn extra money, finding ways to reduce expenses, or moving to a lower cost area. All of these actions can help bring retirement within reach.

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