How to Estimate How Much You'll Need to Retire

How to Estimate How Much You’ll Need to Retire

Four Steps to Arriving at Your ‘Enough’ Number

It’s tempting to think about retirement savings in black and white: there’s a “right” number you need to reach, at which point you have enough money saved to sustain your retirement. The trouble is, there is no right number because every retiree has a different picture of what their ideal retirement looks like. That means the amount of money you’ll need to retire could be vastly different – either far more or far less – than others your age, or even in your social circle. In order to truly understand what your retirement savings goal should be, you need to forget arbitrary numbers and come up with you own personal estimate.

Give yourself a baseline of information by making your most important calculation first: the amount of money you expect to spend each month in retirement. Next, determine the age at which you’d like to retire. With these two pieces of information, you can use the four steps below to come up with a solid estimate of how much money you’ll need to retire.

Step 1: Estimate Your Yearly Expenses

How much do you think you’ll spend annually during retirement? Think about your monthly expenses, both needs and wants, but don’t forget to include an estimate of the taxes you’ll be required to pay on your retirement income. Consider, too, that some of your expenses will change. For example, when you’re no longer working, your clothing costs may decrease. If you plan to travel or take up a new hobby, those may be new costs. It’s usually helpful to begin with estimating your monthly expenses, then multiply that number by 12 and be sure to add in large one-off expenses, such as insurance premiums or a big vacation each summer.

Step 2: Add Up Your Guaranteed Income

Now you need to determine how much retirement income you’ll have from guaranteed sources. This includes things like pensions, Social Security, and monthly annuity payments. Of course, the more guaranteed income you have, the less reliant you’ll need to be on your savings.


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Step 3: Calculate the ‘Gap’

After you calculate your guaranteed income, compare it to your estimated expenses from Step 1 above. The difference between the two is the income gap you need to fill by withdrawing from your savings and investment accounts each year. For example, if you estimate $50,000 in annual expenses and your guaranteed income is $30,000 each year, you have a gap of $20,000.

Once you know your annual gap number, multiply it by the number of years you expect to be retired. (Remember: retirees are living longer!) This figure is the estimate of how much you need to have saved in order to be financially prepared for retirement.

It’s ideal for some people to have at least half of your estimated expenses covered by guaranteed income by the time you reach age 70. If your guaranteed income percentage is likely to be lower than that, it’s smart to consider how you can boost it. Buying an annuity is one common way to get a more guaranteed monthly income in retirement.

Step 4: Consider Best- and Worst-Case Scenarios

Any retirement planning strategy will be subject to variables that are outside your control. Rates of return on investments, inflation, life expectancy, health care costs, and your willingness to spend the principal will impact the amount of money you will need in order to retire comfortably. As you plan, you should account for these variables.

In your best-case scenario, you’ll assume above-average returns on your investments, average life expectancy, and low inflation. If your retirement plan only works with this best-case outcome, you need to alter your plans. This could mean working more years, saving more, or cutting your monthly expenses.


SEE ALSO: Questions You Must Be Able to Answer to Have a Successful Retirement


Final Thoughts on Estimating How Much You’ll Need to Retire

It’s important to spend time on the four steps above so that you have a realistic understanding of the resources you need for retirement. It’s possible you will be surprised at how much you need to save; in which case it can be helpful to enlist expert advice to guide you in developing a strategy.

At Peak Financial Freedom Group, we are proud to help our clients build a financial plan for a confident retirement. Please reach out today if you’d like to discuss a specific plan of action that meets your unique retirement needs.


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