How Much Do You Need to Save for Retirement?

USAA has an EXCELLENT retirement planner, but I think you have to be a member to use it. It asks you what kind of lifestyle you want as a retiree as a starting point and breaks it into categories (with questions such as I want to travel several times a year and such)… The other assumption that really changes the equation is how long you expect to live!

How much you spend depends on what you plan to do. I plan to spend a few decades riding around the planet on a motorcycle. This has a different cost structure than for example, staying inside your subdivision and eating boiled hot dogs. The FIRECalc seems useful because you put your spending amount and horizon.

P.S. FIRECalc says I have a 34.9% chance of success retiring today.

I’ve used the calculator at choosetosave.org It is a program of the Employee Benefit Research Institute. It gives you a “ballpark” figure of what you need in retirement by taking into consideration what you’ve saved, what plans you have (pension/no pension), whether you plan to work in retirement, etc. Here is the link:

http://www.choosetosave.org/ballpark/

For me, it said I need to save $10,000 annually based on what I have already saved, which seems a bit low to me, even though I have saved a lot. It does take into account Social Security Benefits, which you can input “$0″ if you prefer. I did a post on this recently, too:

http://savingmoneyirl.blogspot.com/2008/11/are-you-ready-for-retirement.html

I look strictly at future expenses when determining how much I need. Basically I look at my current expenses – subtract some obvious temporary costs such as mortgage, kid costs etc and then add in some travel costs.

The actual process is fairly involved but my suggestion is that unless you are pretty close to retirement – don’t sweat the details. If you are 30 years old then your assumed rate of inflation will have a far greater impact on your retirement predictions than a small error on your Social Security payment prediction.

Alternatively – if you are fairly young and have obvious financial situations to take care of (ie start saving, pay off debt) then do what Weakonomist does and just work on those.

Many don’t know what their retirement will look like (or want it to look like)till they are about 40 years old and by than if you havent saved chances are you will not reach your “dream retirement”
As couple others said I just save up as much as I can right now and in about 20 years I will have to start looking at the details of my retirement. Right now I have no idea what I will do or if I even want to retire.

When I think about how much I will need for retirement, I base it on how much money I currently spend, and think I will spend in the future. I’m just about to hit 30, so I’m sure my number will change, but right now I figure I’ll be able to live on roughly $40k a year (holding no debt) and would like to “retire” by 55. If I plan to live to 85, my total number needed would be $1.2 million. That doesn’t take into account inflation or interest earned on investments, but it also doesn’t take into account that I plan on setting up some minimal effort streams of revenue. Another consideration is that the house we are in right now is perfect for growing old in since everything that we need (including the master bedroom and bathroom) is on the first floor.

If you’ve seen my blog, you’ll notice that my goal is to build a net worth of $4 million by age 55, but if need be I think I can retire at 55 with $1.2 million. These numbers may seem grossly out of whack, but they’re something to shoot for.

An additional benefit of spending less than you make when contemplating your retirement needs is that any money you’re saving while you work immediately comes off of your cash-flow needs during retirement. After all, there’s no reason to save for retirement when you’ve already reached retirement!

As you’re probably aware, there’s a whole book, “The Number” by Lee Eisenberg, devoted to this very topic. A good read.

Agreed that expenses is the way to go.

Another good calculator I use is, Vanguard’s Managed Payout Fund Calculator…https://personal.vanguard.com/us/funds/vanguard/ManagedPayoutList

These funds are managed just like a pension fund, they’re not your typical retirement income fund. Your payout can change dramatically from year to year.

They help me decide how much portfolio income I would have if I put all my after-tax savings into one of these funds.

Frugal Bachelor’s point is on the money. For most people, it’s a mistake to assume that you’re going to maintain your current spending habits and lifestyle when you retire. It’s a lot more useful to spend some time thinking about what you want to do when you retire, and then figure out how much money you need (factoring in inflation) to sustain that lifestyle. Retirement is all about changing the way you live now. It’s not about living the same life you live now without working. What are you going to do for the 8 or more hours a day that you spend working now? If you can develop a vision of what you want your life to be like when you retire, that will help you figure out how much money you need.

Before this post I had never heard of FIRECalc, but I am starting to see what you like about it. I’ve only had a chance to mess around with it a little, however it seems like a well-rounded tool.

I’m glad you able to shed some light on using expenses as a basis for retirement. A lot of financially successful people I know have spent year living on a fraction of their income and are perfectly fine retiring earlier and simply maintaining their current lifestyle. Of course if they used income in the projections they would have many, many more years of saving to go!

If you are making $50,000 a year and spending $75,000 a year you’ve likely got some bigger immediate issues to take care of before even thinking about retirement planning.

FIRECalc looks like an excellent tool. I think using any CAGR calculator can be a helpful planning tool, even though it’s much simpler and more basic than many of the tools mentioned. I would suggest being very conservative when entering the interest rate you expect to get on your money over the long haul. I would go with around 5%. Plan conservatively so your money will last. Best of luck to anyone close to retirement.

Appreciate your thoughts on using future spending as a better measure than current income. While I agree this makes sense in theory, I think the reason most calculators use income is because it’s a much more objective number. Most people (unfortunately) don’t have a good understanding of how much they spend each year. More importantly, most people drastically underestimate this amount (it’s easy to plan to save money in future and the nobody ever factors in the inevitable emergencies that come up). So I wouldn’t be too hard on the conventional wisdom, at least as a starting point for the general population.

@ #19 ANN:

You are 30 and own 400k in real estate and have 100K in cash? Would you mind expounding on that a bit?

My goals are in line with yours and we are the same age and I’m nowhere near those numbers. I’d love to get a fresh perspective.

Cheers,

Chris

Thank you to all who have provided calculator sites, I intend to make the search for the best software my quest over the next few years. Any other pointers to calculators – even those you have to buy or subscribe to – will be appreciated. Now if only I could find a NAPFA advisor who has also been trained by Ed Slott…

I agree with using expenses to calculate retirement needs, especially in this current economy.

My husband and I are in our late 30s, a couple of years ago we worked with a financial advisor to come up with a plan for our financial future and retirement – using then current due income as basis of course. A year later I was laid-off so all calculations went out the window.

Fortunately I am a firm believer in saving portions of my income, I started with $200 and later on $1000 a month, I just stash them in a local bank that pays high interest and not look back. We also are debt free, we have no outstanding balance on our credit cards and all cars are paid off. The only big ticket item is our mortgage. To make a long story short, I was able to use my savings to get through the laid-off even with a newborn baby (I was 8 months pregnant when I was laid-off, which contributed to my situation for not pursuing another employment).

I have been off from work for a year and my annual spending while staying at home with the baby is approximately $12,000 (this includes grocery for the household, baby expenses, and personal expenses). My husband’s income covers all the expenses related to the household (mortgage, utility, gas) but no extra left for savings. We have a little over $100K remaining.

I’m about to go back to the workforce because our 401(K)s are more like “201″. Relying solely on my husband’s income have no rooms for savings, which we need. We also have to save for our baby’s college.

A few points I’d like to make:

1) Year-End Summary from your credit card – The year-end summary is very helpful to me to make me understand my spending patterns over the year; that’s how I get the $12,000 figure for my annual expense while out of work. I charge everything – of course it also comes with a self-imposed habit of paying it off monthly. I never carry balances – I either pay them off or forget to pay that month (which is very bad!)

2) Please don’t underestimate the power of stashing a portion of your paycheck everytime when you get paid. I always set up 2 accounts for direct deposit – I set aside an amount (like $200 per paycheck) to automatically go to my savings account; the rest goes to the checking account for spending. I never look at the savings account so mentally, they are “out of sight, out of mind”. I don’t touch this account unless is emergency, like my laid-off. I was pleased to see the balance when I needed them. I use http://www.Presidential.com and INGDirect.com by the way.

3) We also set up a 3rd savings account to buy things that we like, but not necessary. We set up a goal to put in $200 a month into this account. Once I get back to work I will be able to contribute more, we’ll probably get the TV he wants by Christmas 2009.

For us Canadians there’s an excellent book titled “Smoke and Mirrors” by David Trahair. It points out many of the fallacies in the “You need $X for retirement” wherein the $X is north of $1M.

At least in Canada he points out you can have a very comfortable retirement with $400k – $500k in the bank plus the pension plans provided by the Federal Government. He also provides spreadsheets to use to calculate how much you’ll actually need.

A friend of mine put me onto the book. He was in in his 50s and watching TV and worrying about his retirement. He picked up this book and realized he didn’t need as much as he’s been led to believe. He’s since semi-retired pulling in just enough money to not touch his nest egg, and he’s the happier for it.

Trahair points out a series of fallacies used by retirement investment advisors — of which he was one in the past. The primary point is that a slew of expenses simply disappear as you age. He points out:

- RRSP payments (retirement savings plans)
- RESP payments (education savings plans)
- Mortgage payments (you should have paid off the house by 65
- Vacation, etc. costs diminish if you have kids as you’ll foot bills only for you and the spouse for trips
- Clothing bills drop as you’ll probably not be buying as much as when you have a family or need a fresh wardrobe for work
- Utility bills will diminish somewhat simply by having fewer people in the house

He says savings can be had further by driving cars for longer periods of time, instead of trading in every 3 or 4 years (something this site espouses). And, if the house the family grew up in is too large, to downsize/rightsize.

Canadians have the further advantage that we don’t need money for healthcare costs.

I think that book nicely aligns with the thinking espoused on this site.

BTW, CPP (Canada Pension Plan) + OAS (Old Age Security) provides about $15k/person annually so an elderly couple will pull in about $30k.

Obviously, if you’re sans kids the formula changes, but as my childless friends point out their expenses are lower to start with so they can save more for longer.

@ Brian — thanks! I think I understand what you mean — So plan to withdraw an amount that will be replenished as you go along?

I’ve posted my method before, but here it is again. It’s based entirely off your expenses, not your income, like JD recommended.

Start with your current total monthly expenses.

Subtract expenses that you’ll no longer have upon retirement (mortgage, saving for retirement, life/disability insurance, saving for kids’ college funds, maybe only need one car instead of two, that sort of thing).

Add expenses you’ll have in retirement that you don’t currently have. This would be things like a travel fund (if you hope to travel once or twice a year), golf club membership, private health care, etc. Use current dollars, not inflation-adjusted (we’ll do that at the end).

Multiply this (monthly) amount by 12 to get an annual amount.

Figure out how much pre-tax income you’d have to earn to be left with this sum after taxes. That is, figure out the gross income that will leave you with enough to cover all the expenses you just calculated. Note that if you’re married (and expect you still will be upon retirement), you can split the total between you and your spouse and reduce your total tax burden.

Subtract any taxable annual retirement benefits you expect to receive (Social Security, private pension, etc.).

Now, finally, adjust upwards for inflation depending on how long you have until retirement. I typically use a relatively pessimistic inflation value of 3.5%. Since I hope to retire in 22 years, I multiply my total by (1.035)^23. Note that doing it this way simplifies things, as it assumes the tax brackets will adjust upwards at the same rate as inflation.

Lastly, multiply the result by 25. This will produce the grand total you need to save in order to comfortably retire, assuming you withdraw 4% per year and increase it each year to match inflation.

J.D.,

Thank you for drawing attention to the difference between income and outgo! This is an important one, and one that I think tends to get glossed over by a lot of people, both average folks and the supposed “experts”. I think the default assumption is that most people will spend as much as they make, in which case the distinction is moot, but the truth is, a lot of financial advice works differently if your expenses are noticeably lower than your income. I’ll be writing a post soon about why I find it more beneficial to pay myself LAST, rather than first, when I’m in that situation.

Thank you!

-David Safar

@ Gene:
I believe you have made very valid points…and I used to think the exact same way. But, the game has changed. I saw my own parents struggle when they had hopes of ‘downsizing’, only to find that the home prices had skyrocketed. And of course, here in the U.S., we are simply not able to depend on a SS check since the gov’t can’t sustain it for too much longer. My husband is vested in a gov’t pension, but now we’ve been seeing pensions disappear- how any company or gov’t can justify taking away something that has been counted on by so many people for retirement is beyond me. So, I think with these uncertainties (as well as whether or not we’ll still be solvent in our later years what w/today’s atronomical costs of healthcare and elder-care), we’d be better off to be prepared than not.

I’m going to have to disagree. I think income is a good measure because it is the pool from which you are allocating your funds. If you are currently spending only 50% of your (after-tax) income you are putting the other 50% away for retirement. In that case you will have significantly better lifestyle after you retire than before. On the other hand, if you were to base your retirement needs on your current (low) spending you will need to save less now and can therefore spend more creating an odd feedback loop. I think the percent of income calculations are (or at least should be) designed to maximize both pre and post retirement.

One problem I see with most investing advise is that money is seen as the goal rather than a means to an end. The concept of saving up $2M so that you can only take out 4% per year and have it last forever is horrible advise in my view. What good is that $2M in the bank when your (and your spouse’s) time is up? There is no prize for dieing rich. Obviously you should live within your means, but you are not helping yourself by living significantly under them!

I have to admit I envy commenters planning into their 90s and 100s. Nice problem to have! My husband’s family is lucky to hit 60. Unfortunately, we are planning for a long widowhood for me.

If you ignore the status quo and cut expenses way back, you can retire extremely early:

http://earlyretirementextreme.com/2008/08/how-much-do-i-need-to-save-for-extreme-early-retiremen.html

This is one of the main ideas in “Your Money or Your Life” by Dominguez and Robin.

I have an overdue thank you for you. I’ve been reading your blog for about two years now. You were the impetus for me to take charge of my finances. My husband and I have now paid off $12,000 of debt that we accumulated over eight years. We have over $5000 in our savings account. Once we reach six months worth of expenses in savings, we will switch to saving for retirement and college for our kids (I already have a great retirement plan through work). I’m in the best financial shape of my life now. It was arduous and not fun at the beginning, but now it is incredibly fun for both my husband and me. We are splurging on a Disneyland vacation with the kids this fall, but only because we can pay cash and still meet our financial goals.

If you ever find yourself wondering if you’ve made an impact, you have. Thank you.