Trying to identify how much money is needed for a comfortable retirement remains a mystery for most individuals. As Baby Boomers, Gen X, Gen Y and Millennials march towards retirement, the retirement dream seems harder to obtain. Individuals don’t have much faith in their retirement planning because they’re not sure how to calculate the amount of money needed for a sustainable retirement.
Do you know how much money you’ll need for your retirement? Fear not because I’ll walk you through my three-minute retirement plan calculation.
The first step in determining how much money you’ll need for your retirement is to identify your annual household expenses. If you’re not sure how much money you spend on your expenses, start today by reviewing your bank and credit card statements.
The second step in this process is to multiply your household expenses by 25. If your household expenses are $100,000 per year, then multiply this number by 25 to arrive at $2,500,000. Your retirement asset goal is $2.5 million and you can retire today if you’re blessed with this level of assets. We can’t stop here, however, because you may have other sources of retirement income.
The next step is to subtract your Social Security benefit from your household expenses. If your annual Social Security benefit is $25,000, subtract this benefit number from your household expenses. Your adjusted expense number is now $75,000. Multiply $75,000 by 25 to get $1.875 million. Your Social Security benefit has reduced your retirement asset goal from $2.5 million to $1.875 million.
Few workers today have the benefit of receiving a pension plan but if you do, subtract this number from your expenses and Social Security benefit number. If you’re going to receive $20,000 in annual pension payments, subtract it from your $100,000 household expenses and $25,000 Social Security benefit. Your net expense number is now $55,000. Multiplying $55,000 by 25 gives you $1.375 million. Your new retirement asset goal is $1.375 million.
Here is the math:
Household Expenses = $100,000
Social Security Benefit = $25,000
Pension = $20,000
| Household Expenses (A) | Social Security Benefit (B) | Pension Plan (C) | Adjusted Expense Number
(A-B-C) = D |
Multiplier (E) | Retirement Asset Goal (D x E) |
| $100,000 | $25,000 | $20,000 | $55,000 | 25 | $1,375,000 |
Inflation, of course, will play a big part in your future retirement calculation. $100,000 in expenses today will balloon to over $209,000 in thirty years with a 2.5% inflation rate. As your expenses double because of inflation so, too, will the assets you need to retire.
Here is a chart to help you with your inflation adjusted retirement calculation.
| Age | Inflation Factor | Expenses Today | Future Value Calculation | Multiple | Assets Needed |
| 40 | 1.85 | $100,000 | $185,000 | 25 | $4,625,000 |
| 45 | 1.64 | $100,000 | $164,000 | 25 | $4,100,000 |
| 50 | 1.45 | $100,000 | $145,000 | 25 | $3,625,000 |
| 55 | 1.28 | $100,000 | $128,000 | 25 | $3,200,000 |
| 60 | 1.13 | $100,000 | $113,000 | 25 | $2,825,000 |
| 65 | 1 | $100,000 | $100,000 | 25 | $2,500,000 |
Once you’ve identified your retirement number you can adjust your planning and investing to help get you closer to your retirement goal. Now that you know your target retirement number you can compare it to your current level of assets. If you have more assets than you need, you can retire at any time. If your assets are currently below your retirement number, keep saving and investing so you can surpass your goal.
I hope this simple, three-minute financial plan gives you a better picture of your retirement planning needs.
There’s never enough time to do all the nothing you want. ~ Bill Watterson, Calvin and Hobbes.
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. For more information on retirement planning, please visit www.parrottwealth.com.
September 28, 2017