How much do I need for retirement? Determining the amount needed for retirement is not always an easy task, today we will provide a step by step guide to determine your financial needs for comfortable retirement. You can also download this Retirement Calculator worksheet to estimate your retirement needs and annual saving amount.
We have completed the basic steps in financial planning and are now at the wealth building stage, in the previous step we discussed the importance of Investment Policy Statement (IPS) and saw a few samples. Before you can complete your retirement IPS you will need to know, or estimate, how much you will need for retirement and determining that can be tricky.
Don’t Worry, just yet.
As an adviser when I discussed the amount needed to retire comfortably with clients I would always see the shock on their faces “Wow that is a lot of money, I’ll never have that much!” They often forgot that the amount is not needed today or this year. It’s accumulated over couple of decades, so if you see a large amount at the end, do not worry; just yet.
1. General Rules
Once you retire not only will your income decrease but so will some of your expenses. Your children will not be living at home anymore, your mortgage will be paid off, you won’t have work related expenses, and so on. As a general rule it is assumed that one will need about 75% of their current income at retirement for a comfortable lifestyle, of course you can choose whatever percentage you wish.
Annual Retirement Income = Current Income X 0.75
2. Inflation
Inflation is when living expenses increase over time and money loses its value; $100 can buy you a lot more today than it will ten years from now. Since most people plan for retirement twenty to thirty years in advance we need to take inflation into account when calculating retirement needs.
Nobody can predict what the exact inflation rate will be over the years but a good number that is generally used is 3%. Some years this will be higher and other years it will be lower, but over the long term 3% inflation is a reasonable estimate.
3. Sources of Income – How much will come from your savings?
Your annual income at retirement will not just be from your savings, in most cases there will be other sources of income. These sources could be government pension plans and perhaps company pension. To determine how much will come from your savings; add up all other income sources and subtract this from your total estimated annual income, the difference will come from your savings.
Income from your savings = Annual Income needed – Income from other sources.
4. How many years?
We now know how much is needed for a comfortable retirement and how much of this will come from your savings the next question is for how long will you need it? Current life expectancy is about 82 years for men and 87 years for women; I think it is safe to assume that with medical advances life expectancy will increase. So let’s assume a life expectancy of 90, take 90 (or whatever you believe your life expectancy to be) and minus your desired retirement age this will give you the years in retirement.
Years in Retirement = Life Expectancy – Desired Retirement Age
5. Total Retirement Fund
We determined how much you need annually after inflation and we know for how long you will need it, to calculate your total retirement fund you simply multiply the annual amount needed (after inflation) by the years needed.
Total Retirement Fund = Annual Income from Your Savings X Years in Retirement
6. How much should I Save?
We have now determined how much you will need at retirement, but how much do you need to contribute on monthly or annual bases over the years to reach that goal?
This is a somewhat of a complicated calculation and needs to be done with a financial calculator; here is a Retirement Calculator worksheet that you can download. It will estimate your needed retirement fund and annual savings amount to reach that goal.
Start Early & Magic of Compounding
As you can see from above there are many unknown factors when it comes to retirement planning and the further you are from retirement the harder it will be to get accurate numbers, I would advice you to start saving/investing early and as much as you can to make sure you have a good retirement fund. Don’t forget the Magic of Compounding!
Download Retirement Calculator Worksheet
Some Retirement Resources & Articles
Million Dollar Journey on How much do You Need to Retire Early
Four Pillars on Safe Withdrawal Rule for Retirement Funds
Canadian Capitalist on When Does a RRSP Contribution Not Make Sense?
MSN Retirement Calculator
Canadian Retirement Income Calculator
Thanks for the link.
Right now I have set more of a “short-term” goal – well, short compared to retirement savings calculations.
I am working to save $100,000 in my emergency fund by the end of 2013 (that’s my short-term retirement goal). After that I will set new goals to build my wealth (long-term).
I also have smaller financial goals to help me build up to the $100,000.
Oh woow you want $100,000 as an “emergency fund” is there a reason for such high amount? oh and btw the excel calculator can be used for other goals as well, it’s Time Value of Money calculation
Hi there,
Can you make Column B on the ‘Annual Savings Amount’ tab a bit wider?
After I plug-in all my numbers, I get this:
Annual Saving @ Beginning of the Year ##########
Annual Savings Amount @ End of the Year ##########
Thanks!
Thanks!
Thanks Erick I will take a look at it in the morning and and reload, i’ll fire off an email when it’s done
It’s now updated
@ Tod,
Thanks Tod for the comment, you make very valid points, especially your first point is very true. I very much believe that your retirement fund should depend on your retirement life style.
Retirement Planning is not always an easy task to do and the further you are from retirement the complicated it will be. The best advice is to save as much as you can as early as you can.
Your post perpetuates the conventional wisdom on retirement planning, but I believe there is room in the discussion for some alternative points of view…
1: The 75% rule is a myth. People retiring early frequently spend more on active retirements, and studies show spending declines in nominal terms with each decade of retirement. It is worthwhile to drop the rule of thumb and develop a budget based on your actual retirement plan. You could spend a lot less if your plan is to live the open road in an RV, and it could be a lot more if you are a world traveler. It also depends on your definition of “retirement” which could involve part-time work or a paid avocation/hobby. Build your budget based on your dream vision for retirement and drop the rule-of-thumb.
2: Inlfation: only recent history supports the 3% assumption. There have been decades of wide variance from that assumption when you look further back. Given the debt, deficits, and out of control entititlement program spending for our government it might be wise to assume a more aggressive inflation estimate in the future than what the recent past indicates. Underestimating inflation is a risk that can destroy an otherwise well planned retirement.
4: Life expectancy is another dangerous area of retirement planning. Expectancies are constantly rising and biotechnology advances promise to accelerate that process. In addition, using actuarial tables to develop life expectancy assumptions is meaningless for any one individual because the likelihood that your expectancy will be anywhere close to the average is minimal at best. Any one person’s life expectancy is not an actuarial event so it is misleading to plan it that way. There is no statistical validity to the approach. I encourage clients to budget for very long expectancies unless they have clear health reasons to assume otherwise. The danger is just too great.
Anyway, I could go on and on but there is just too much to include in a comment to a post. Hopefully these tips motivate readers to look beyond the standard assumptions and consider equally valid alternatives that could completely change how they approach retirement planning.
I hope that helps…
Todd R. Tresidder
I think it’s one of our life needs that makes us self dependable and everyone has a retirement plan because it helps us to be with our passion.