# How to Calculate What You'll Need to Retire

How do you figure out exactly how much you need to retire? With a few assumptions and estimates, it's fairly easy to come up with a theoretical number to start with. The complicated part is figuring out how to estimate or predict real life, which can trick us into thinking things will always be fine or terrible even though we have no idea what's going to happen. Still, if you don't get hung up on the unknowable, you can come up with a perfectly reasonable retirement number.

Start by estimating how many years you will live in retirement. Look at the average life expectancy for someone of your age and gender and consider the ages at which your grandparents or parents may have passed away to get a sense of your own lifespan.

Factor in what age you expect to retire. For example, if you hope to retire at 65 and you think you will live to 85, then you expect to live in retirement for about 20 years. You could live past 85, or you may not, but at least you now have a goal to start with.

The next thing to estimate is how much of today's income you will do you need to live on in retirement. Later in life, you may be able to cut expenses (finish raising the kids, downsize the house, or eliminate debt including the mortgage) and live leaner than you do now, or you may want the same standard of living you currently have.

At a minimum, you should plan on needing 80% of your current income, but an even better rule of thumb is 85%.

Let's assume that Jaime currently earns \$50,000 per year. After creating a budget, she decides she could actually live on \$40,000, so she sets her retirement goal at 80% of her current income. She plans to retire at 70 and, with her family history, she figures she will likely live to about 90, giving her 20 years in retirement. The simplest calculation is:

\$40,000 x 20 years = \$800,000 needed for retirement

However, this is a little more complicated than that. What you really want is an amount that generates enough annual interest for you to live on without touching the principal.

In Jamie's case, the \$800,000 may actually work. If you had \$800,000 and invested so that you were earning 5% annual interest, your portfolio could pay \$40,000 a year in interest alone. Of course, market returns can be variable, so if you have a lower annual return assumption—say 3%—then you would need nearly \$1.4 million to generate \$40,000 per year. Taking into account inflation, taxes, or long years of poor performing markets can impact your assumptions.

Social Security is another factor. If you receive Social Security, that will help you meet monthly expenses. If Jamie needs \$3,300 a month to live and Social Security pays \$1,500 a month, her share is reduced to \$1,800. You can try to plan with those benefits in mind. The Social Security Administration has a variety of calculators available that you can use to estimate what your payments will be.

Of course, Social Security itself is a complicated institution. If you are an optimist, you can go with that number as your hypothetical, or reduce to scale according to your how confident you are in receiving Social Security when the time comes.

## Account for Complications

Jamie may want to shoot for a higher goal. Not just because she's skeptical she'll ever see a Social Security check or because she thinks taxes and inflation can only go up, but also because she wants to plan for those unexpected expenses that could eat away at her retirement budget.

Health care is are the obvious example—one life-threatening illness could quickly wipe out a portion of her savings and the interest it pays. She can put money aside each month for long-term care insurance, which helps pay for in-home and facility nursing care, but there will be expenses that insurance does not cover. A volatile stock market, sky-high income taxes or capital gains rates are other risks to your retirement income.

On the plus side, remember that retirees don't take all of their savings at once. Your money should continue to work for you, earning interest and dividends even as you start taking distributions.

## Plan and Budget

You can use a retirement calculator such as the Employee Benefit Research Institute's Ballpark E\$timator or the user-friendly interactive Merril Lynch retirement calculator to see what is possible for you. With these types of retirement calculators, you can change your assumptions to change the result, but if you really want to make sure your estimate of how much money you will need to retire matches your goals, try completing a budget plan for retirement.

Creating a retirement number goal makes sense for some people, but for others, it's easier to contemplate saving \$200 a month or 6% to 10% of their annual salary. Saving 15% is the goal that the Center for Retirement Research recommends.﻿﻿ Some financial experts recommend aiming to save at least 12 times your current salary. If you are just getting by financially, it's more important to save what you can than to aim for such an impossible number that you end up saving nothing.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.