In order to determine how much money you need to retire, you will need to have an accurate estimate of your retirement expenses and your guaranteed sources of retirement income. Then you can *calculate the gap* between those two numbers, and determine how much money you would need to save to fill in the gap, or how much you would need to reduce expenses.

You can use the example below to calculate this yourself, use an online retirement income calculator, or hire a qualified financial planner to help you.

### Calculating the Gap

Assume you have determined that to meet your retirement expenses you will need about $71,000 of gross income per year (gross means that includes what you would pay in taxes), and that Social Security is going to provide about $21,000 per year.

Your gap is: $71,000 - $21,000 = $50,000.

Now you know that you must withdraw about $50,000 per year from your saving and investments. How much money would you need to have to invested to generate $50,000 per year of cash flow?

That depends on two things:

- The rate of return your investments earn.
- Whether you are willing to spend principal or not spend principal.

If investments are earning a rate of return of 5% per year, you would need $1 million to generate $50,000 ($1,000,000 x 5% = $50,000) per year of income, and not spend any principal. This means 25 years later you will still have $1 million.

If you decide that it is okay to spend principal down to zero by the time you die, then you would need about $704,000 earning 5% a year to last for 25 years.

At the end of 25 years you would have spent all the money.

In this simplified calculation the answer to how much you need to retire ranges from $700,000 to $1 million.

### Revising the Gap

To simplify things, I have ignored two additional factors that are used to determine how much you will need to retire.

Those are inflation and life expectancy.

Unless you know exactly how long you will live, what you will spend each year, and how much of an impact inflation will have, unfortunately you cannot know *exactly* how much money you will need to retire.

Since you cannot know exactly how much you will need, the next best thing is to develop both a best case and worst case scenario. In your best case scenario you assume average investment returns, low inflation and controlled spending. In a worst case scenario you assume below average investment returns, high inflation and unanticipated expenses.

You can also run various scenarios where you delay the start of Social Security to your age 70 so you get a higher monthly amount. If you still wanted to retire at 66, you gap amount will be higher in your 60's, but then much lower once you reach 70. Projecting these scenarios in a retirement income timeline format can help see which decisions may lower the total amount you'll need to retire.