In the discussion about income for life and annuities earlier this week a lot of interesting points were brought up. We all know that we need to save something for retirement, but just how much are people expecting to save? You hear all sorts of numbers thrown out there saying you need to have a million dollars by retirement, or save up ten times your annual pre-retirement income, and so on. But these are just broad assumptions and most people’s true needs are going to vary significantly.
So, have you thought about how much money you should have saved up by the time you retire? One way to figure this out is to work backwards. Instead of just shooting for a big number, start with the amount of income you’ll likely need to receive from your investments in retirement. From there, you can then calculate how much you need to have saved up so that you can sustain that income without depleting your nest egg. Here’s an interesting calculator that can do just that. It will take into account your age, expected retirement, expected rate of return and rate of inflation, and then ask you for how much money you’d like to receive each month from your investments. Then, it calculates how much you should try to save by retirement, both adjusted and non-adjusted for inflation.
According to my numbers, after factoring in inflation I need to save up between $5 and $6 million to reach my monthly income goal. Of course, this is based on an early retirement, assuming no pension, no Social Security, and high income since I plan on doing a lot of things in retirement that cost money instead of just sitting at home. It seems like a lot, but it could be doable. Granted, we’re not able to save enough each year to hit that target yet but it gives me a number to shoot for.
So, how much money do you need to retire? Were you shocked at the results?
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Sadie, the folks who plan ahead will be the ones paying for the people who don't plan ahead of course.
At first the retirement calculator appears to be over & beyond reality; however when I consider cost of new car in '64 was $3,000 and is now $20,000 to $30,000, this brings reality home. My fear is who will support all the folks who fail to plan ahead?
One thing to remember - with our longer life span there comes the whole issue of those last several years - and what may well happen to us. Remember that a male age 65 has 1 chance in 3 of needing Long Term Care before they die - and a female age 65 has 1 chance in TWO. BASIC LTC in Canada costs $30,000/year - quality care costs $60K and "top end" costs $110K (Montreal figures used) So - to that basic $3,000/mth referred to earlier - do not forget to include these costs
Whoa...according to the calculator I need to have slightly over $4 million saved. I was expecting I would need something between $1-$3 million.
@lynnor - I agree that these online calculators can be somewhat simplistic.
lynnor - to your point, I'd think it depends heavily on what one lives on now. 20% to retirement savings, 20% to the mortgage, another 10% or so to college savings, looks like I'm living on less than half my income. Once those 3 things go away, 60% will be a nice increase from here.
This question about how much is enough is a tough one, especially when you take into consideration what a HUGE difference interest rate and inflation assumptions make. I ran some hypothetical numbers on the calculator in your blog and the difference between assuming 8% versus 7% forced me to save 27% more per month. The same would have been true holding the interest rate constant and assuming 4% versus 3% inflation. How many times have you heard someone say, “sure I can get 7% or 8%” and yes those interest rate assumptions are very similar to one another, but the impact of the 2 different assumptions is vastly different? Now enter basic Behavioral Economics. In reality, most people don’t know what their portfolios are actually earning in large part because they fall prey to “mental accounting” and keep track of their losses and gains separately. They may not understand how the two interact. This can lead to some very unrealistic assumptions about what they are actually earning versus what they think they are earning. Any suggestions on how people can use the right interest rate assumptions?
online calculators are ok...as entertainment. People also need to factor in increased health costs/long term care in retirement, probable longer life expectancy, etc. Also most people think they can live on 50-60% of pre-retirement income and will be in a lower tax bracket. Speaking with a lot of accountants and financial planners, none have seen that (except 1 client that always live far below his means). People usually need about 85% of pre-retirement income in retirement.
Interesting article - I would like to have at least between 1 and 3 million. But personally - I don't think people really need that much money once they're in retirement.
To have a good retirement - I think you just need a stable place to live meaning you should own your home. And after your living situation is figured out you just need about at the most 3 thousand every month. So if you retire when you're 65 you just need to account for 20 more years of living. So technically most people would be good with about $720000 saved.
This one is hard to peg down. I figure it's somewhere in the range of whatever it takes to get the median family income at a 4% withdraw rate for your family situation. So for me that's families with 2 or more people where the median is 62K or so about 1.55 million or so.
Of course, that's going to change by a huge amount by the time I retires, but we have two people working on it anyway.
I would like to think that a good target to shoot for is just above the median savings for your age group. At least you'll be better off than 50% of the population.