IQ Fifty Plus Guide

Retirement Planning

Financial Planning and Saving for Retirement

How much money will you need to retire?

Every financial service provider on the Web seems to have an answer—and a calculator. But will they give the right answers for you? These articles may help clarify some issues before you use the calculators.

How much will you need to retire? by Robert Brokamp at the Motley Fool uses real consumer spending figures to look at average expenditures by age for such categories as food, housing, health care, transportation and entertainment.

Have I saved enough? by Walter Updegrave on CNN/Money offers an overview of what you need to do to answer this question for your circumstances.

Current vs. retirement income: How much do I need?, another take on the question by Walter Updegrave, on CNN Money.

Each individual or couple's retirement situation is different and the amount of income you require won't be the same as someone else. That said, here's a way to come up with a rough estimate. (You'll also need some if not all of this information to use the calculators listed below.)

Determine the income you will need

A good way to make an accurate estimate of how much income you'll need is to keep track of your current living expenses for at least six months or as much as a year. This can help you project the amount of income you'll need in the future.

You should take into account that certain expenses will probably decrease (or go away entirely) and others will increase. Be sure to estimate these expenses for both you and your spouse. Here are some examples:

Decreasing expenses:

Commuting costs and business travel.
Union and/or professional dues.
401(k) plan contributions and Social Security tax deductions.
Business clothing.
Work-related social expenses.
Certain automobile expenses.
Income taxes.
Mortgage payments (depending on the duration or your mortgage).
Child-rearing expenses.

Increasing expenses:

Travel, entertainment, and hobbies.
Medical and dental expenses.
Medigap health insurance premiums.
Long-term care insurance.
Gifts to family members (particularly if you choose to use gifts in your estate planning.)
Volunteer expenses.
Care of elderly parents.

After you have a good estimate of all projected expenses, including "discretionary" expenditures, estimate the total amount you (individually or as a couple) will need for annual income.

Next, you need to estimate for how many years you will need that annual income. At what age do you plan to retire? 65? Earlier than 65? Later than 65? When does your spouse plan to retire? Also consider your life expectancies. Do family members routinely live into their 90's? Estimate the number of years you'll need income. Multiply the yearly income by the number of years. This will give you a rough estimate of the total amount you may need.

IQ Tip: Remember that inflation over the years will increase the annual income that you will need to maintain the same standard of living. In recent years inflation has remained fairly low: since 1995, rates of inflation have ranged from 1.6% to 3.4% annually according to the U.S. Bureau of Labor Statistics. But even that range of annual increase in the costs of goods and services increases the total income you need. You can use the FINRA Retirement Calculator to estimate the impact of inflation at various rates. (FINRA is the Financial Industry Regulatory Authority.)

Determine the income you will have

To determine an estimate of the total income you have, given your current situation, you need to gather information from several sources.

List an estimate of what you'll receive from Social Security.

You can get an estimate of what you'll receive from Social Security. If you're over 25, then you receive an annual Social Security Statement about 3 months before your month of birth. (For example, if your birthday is in April then you should receive your statement in January.) If you can't find your latest statement, you can request a statement at any time. You can also use one the of the benefit calculators on the Social Security web site. Once you have a benefit estimate—either from your statement or from one of the benefit calculators—you can use other calculators on the Social Security web site to see how different retirement dates and situations might effect your benefits. For example, the Retirement Age Calculator shows how retiring early reduces your monthly benefit.
List the estimated amounts of any assured income—pensions, disability benefits, annuities, etc—you will receive. (Read more about pension and annuity payouts.)
List the current amount of money you already have saved. Because you desire only a rough estimate, use the total of current balances in IRAs, 401(k)s, mutual funds, and other investments.

What's the total of these potential sources of income? Note that for the purposes of this rough estimate, you need just the sum of the estimated amounts you've listed.

Determine how much more you will need

You now have two figures: 1) how much you will need and 2) how much you potentially and reasonably will have on hand. The difference between the two figures is how much more you will need to save.

Retirement Savings Calculators

A number of websites have retirement savings calculators that let you plug in various figures to predict approximate future income based on the factors you provide. You may wish to run the numbers on several in order to compare.

Ballpark Estimate from the American Savings Education Council. This one-sheet calculator “offers users a way to obtain a rough first estimate of what Americans need for retirement. The worksheet assumes you’ll need 70% of current income, that you’ll live to age 87, and you’ll realize a constant real rate of return of 3% after inflation.” Use it online or printout. A Spanish language version is available.

Retirement Planner from CNN/Money

Retirement Calculator from FINRA, the leading private-sector provider of financial regulatory services (overseeing brokerage firms and brokerage agents).

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