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Sunday February 14, 2016

Savvy Living

Savvy Senior

How to Calculate Your Retirement Number

Can you help me calculate about how much my wife and I need to save for retirement? We are both in out late-50s and want to see where we stand.

Calculating the approximate amount of funds you'll need to save for a comfortable retirement is actually pretty easy and doesn't take long to do. It's a simple, three-step process that includes estimating your future living expenses, tallying up your retirement income and calculating the difference. There are even a host of online calculators that can help you with this.

Living Expenses


The first step is the most difficult—estimating your living expenses when you retire. If you want a quick ballpark estimate, figure around 75% - 85% of your current gross income. That's what most people find they need to maintain their current lifestyle in retirement.

If you want a more precise estimate, track your current living expenses on a worksheet and deduct any costs you expect to go away or decline when you retire. Then add whatever new costs you anticipate.

Costs that you can deduct from this worksheet include work-related expenses, like commuting or lunches out, as well as the amount you're putting away for retirement. You may also be able to deduct your kids' college payments and your mortgage if you expect to have those costs paid off by retirement. Your income taxes will likely decrease, so that might lead to a deduction as well.

On the other hand, some costs will probably go up when you retire, like healthcare. Additionally, depending on your interests, you may spend a lot more on travel, golf or other hobbies. If you're going to be retired for 20 or 30 years you also need to factor in the occasional big budget items, like a new roof, furnace or car.

Tally Income


Step two is to calculate your retirement income. If you or your wife contribute to Social Security, go to ssa.gov/myaccount to get your personalized statement. That statement estimates what your retirement benefits will be at age 62, full retirement age and age 70.

In addition to Social Security, if you or your wife has a traditional pension plan from an employer, find out from the plan administrator how much you are likely to receive when you retire. You should also add any other income from other sources that you expect to receive, such as rental properties, part-time work, etc.

Calculate the Difference


The final step is to do the calculations. Subtract your annual living expenses from your annual retirement income. If your income alone can cover your bills, then you're all set. If not, you'll need to tap your savings (including your 401(k) plans, IRAs or other investments) to make up the difference.

For example, let's say you need around $55,000 a year to meet your living expenses and pay taxes. Let's also assume that you and your wife expect to receive $30,000 a year from Social Security and other income. That leaves a $25,000 shortfall that you'll need to pull from your nest egg each year ($55,000 - $30,000 = $25,000).

Then, depending on what age you want to retire, you need to multiply your shortfall by at least 25 if you want to retire at age 60, 20 if you want to retire at age 65 or 17 if you want to retire at age 70. In this case, that would equate to $625,000, $500,000 and $425,000, respectively.

Why multiply the shortfall by 25, 20 or 17? You want to do so because that would allow you to pull 4% a year from your savings. That would be a safe withdrawal strategy that, in most cases, will let your money last as long as you do.

Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Living” book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization’s official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.

Published February 12, 2016
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