How Much Money Do You Need To Retire
How much money do you need to retire? A Simple Calculation.
So, to answer the question, how much money do you need to retire, you’ll find there are many ways to figure that out. One of the methods that I prefer isn’t very hard, and only requires some simple math.
This method starts by calculating the amount that you will need to spend on an annual basis. Just be sure to factor in those expenses that are paid only once or twice during the year. These include real estate tax bills, life and other insurance bills, vacations, and don’t forget federal and state income taxes.
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The easiest way to determine how much money do you need to retire and spend in retirement is to take your current spending and make a list of the following adjustments.
- Enter the amount that you are saving for retirement since there will be no need for that after you retire
- Calculate an estimated tax return based on taxable retirement income and expenses
- If you plan to downsize or move to a lower cost of living area, list the amount that you’ll save on taxes, utilities, insurance, and other expenses
- For most individuals, your overall cost of living should decrease. As you factor in a lifestyle change, deduct commuting costs, less clothing to buy, perhaps lower grocery bills.
- This one is tough. Calculate the change in amount that you may be spending on your children and grandchildren.
Total all of these adjustments and subtract them from the total spending amount above. You should see a fairly significant reduction in the expenses in the area of 30% to 40%, and hopefully more. In retirement, you should have more control on how you plan to live, and consequently, more control of your expenses.
This last area of expenses is an adjustment for healthcare. If you were paying for your own medical insurance, it’s possible, that after joining Medicare, your overall medical insurance expense may go down.
However, there are many variables as you get older. If you or your spouse have medical issues, this may increase the cost of healthcare. Try to do the best estimate that you can here.
Most retirement planners estimate that you will need around 75% to 80% of your pre-retirement income to cover the cost of your retirement standard of living. These percentages, however, are for the average person, and who admits to being just average?
Here’s the simple math to answer the question, how much money do you need to retire?
- List all of your retirement income that you normally receive on a regular basis each year. This includes social security, pensions, rents or royalties, and any other income
- Subtract your expenses from your income. If the number is zero or a positive number, great. You have more income than expense. Unfortunately, after you retire, most individuals end up with more expenses than income. So the negative number is the amount of additional income that we need each year.
- Now, multiply the amount of the annual income shortfall by 25. This will tell you the gross amount of your retirement savings account that will be needed to be able to make withdrawals at the suggested rate of 4% each year. Some retirement planners are now recommending 5% or more.
Here’s a simple example to show you just how the math works.
Let’s assume that your expenses to cover your food, clothing, medical, housing, and everything else is $5,000.00 per month. Your total retirement income from all sources is $3,000.00 per month. That means that your monthly shortfall is $2,000.00. On an annual basis, that is $24,000. Take $24,000.00 times 25 and the amount needed in your retirement account is $600,000.00. This is the amount needed to be able to fund a 4% annual withdrawal.
We hasten to remind you that the above figures, calculations, and projections are estimates and averages. This will give you a rough idea as to how much money do you need to retire.
Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a major law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.