Calculating an approximate number of how much you’ll need to have saved for retirement is actually pretty easy and doesn’t take long. The simple, three-step process includes estimating future living expenses, tallying up retirement income and calculating the difference.
The first step — estimating future retirement living expenses — is the most difficult. If you want a quick ballpark estimate, figure around 75 to 85 percent 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 current living expenses on a worksheet, deduct costs you expect to go away or decline when you retire and add new ones you anticipate.
Costs you can scratch off your list include work-related expenses like commuting or lunches out, as well as the amount you’re socking away for retirement. You may also be able to deduct your mortgage if you expect to have it paid off by retirement, and your kid’s college expenses. Your income taxes should also be less.
Some costs will probably go up, like health care, and 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 some occasional big budget items like a new roof, heating/air conditioning system or vehicle.
Step two is to calculate retirement income. If you and/or your wife contribute to Social Security, go to SSA.gov/ MyAccount to get your personalized statement that estimates what your retirement benefits will be at age 62, full retirement age and when you turn 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 get when you retire. Figure in any other income from other sources you expect to have, such as rental properties, part-time work, etc.
The final step is to do the calculations. Subtract annual living expenses from annual retirement income. If your income alone can cover your bills, you’re all set. If not, you’ll need to tap savings, including your 401(k) plans, IRAs or other investments, to make up the difference.
Let’s say you need around $60,000 a year to meet living and retirement expenses and pay taxes, and you and your wife expect to receive $35,000 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 ($60,000 – $35,000 = $25,000).
Depending on what age you want to retire, you need to multiply your shortfall by at least 25 if you want to retire at 60, 20 to retire at 65, and 17 to retire at 70, which would equate to $625,000, $500,000 and $425,000, respectively.
Why 25, 20 and 17? Because that would allow you to pull 4 percent a year from your savings, which is a safe withdrawal strategy that in most cases will let your money last as long as you do.