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The ABC's and 123's of Calculating Your Retirement Numbers.
November 8, 2010 - W.R. Anderson & Co.
One the biggest headaches that individuals have is how to determine how much money they
need to have at retirement, and how much do I need to save to get there. Unfortunately, with
most individuals using a 401k or 403b as their primary savings vehicle, there really isn't
anyone there to assist them.
If you follow the steps below you should be able to have a basic understanding of how much
you need to have a lump sum (i.e. "your number"), how much you need to save regularly to get
, and what rate of return of asset allocation you need to get there.
A.) How to calculate "Your Number":
1.) Start with how much money you would need to live today. There are 2 ways to figure this
out: You could calculate your base expenses and spending budget or you could take a
percentage of your current annual income. (For this example lets assume I calculate that I
make $60,000 in salary annually. Rule of Thumb says you would use 80% of this number. So
my current living income for this calculation would be $48,000/year)
2.) Then determine at what age you would like to retire. How many years from now?
(EX: Lets assume I would like to retire 20 Years from today.)
3.) We need to determine an assumed interest rate. Most industry insiders will use an
interest rate of between 3-4%. (EX: To be more conservative in my calculations I will assume a
higher inflation rate and select to use 4%.)
4.) Using a Financial Calculator adjust your income from Step # 1 to create an inflation
adjusted income at your retirement age. (EX: Initial Deposit or Present Value/PV is $48,000;
End Date is todays date 20 years from now or N= 20; Rate of Return or i =4; remember to
compound annually. That equals an inflation adjusted income of approximately $105,000 at
my planned retirement in 20 years.)
5.) Now determine what other sources of income you might have at retirement. For
example Social Security or a company pension. (You can use the calculators at ssa.gov to
help determine what your Social Security payment might be) then subtract that amount from
the amount that you calculated in Step #4. ( Assume that I will have $30,000 annually in Social
Security benefits, then my income gap is $105,000 - $30,000 or $75,000)
6.) Take your future income number from Step #5 and divide it by .05 which will represent a
5% withdrawal rate on your investments at retirement ( or divide by .04 to be very conservative)
that result is the total amount of money you will need to retire, your number!
(EX: $75,00 divided by .05 = $1,500,000 which is what I'll need to retire in 20 years from now)
B.) How much do I need to save monthly to hit my "Number":
7.) Once you've calculated your retirement amount, you then need to select an assumed
rate of return for your investments. This part can be the most difficult, because you essentially
just making an educated guess, so here are some general estimates to use based on your
overall risk tolerance:
For Conservative Investors use an assumed rate of return of between 4-6%
For Moderate Investors use an assumed rate of return of between 6-8%
For Aggressive Investors use an assumed rate of return of between 9%-11%
(It is not generally recommended to long-term planning with returns in excess of 11%)
8.) Using your Financial Calculator plug in your data. Your Present Value is the current
amount of money you have saved. Your Future Value is "your number" for Step #6 from above.
Your N value or number of periods is the number of years until you want to retire. Finally, you I
or Interest amount is the assumed rate you decided from Step #7.
(EX: Assuming a 8% rate of return and a starting savings $100,000. My input data would be
PV = 100,000, FV = 1,500,000, N = 20, I = 8 then my calculation for PMT or payment would be
$22,600/year; then divide that by 12 or by the number of pay periods per year to determine
how much I needed to save monthly or per pay check to retire.) Don't forget about employer
match in your calculation, that will lower the amount you would need to save dollar for dollar.
This is just a general rule but will get you well underway to an understanding of what your
basic needs and goals should be to meeting your current retirement expectation.
Best wishes!
November 8, 2010 - W.R. Anderson & Co.
One the biggest headaches that individuals have is how to determine how much money they
need to have at retirement, and how much do I need to save to get there. Unfortunately, with
most individuals using a 401k or 403b as their primary savings vehicle, there really isn't
anyone there to assist them.
If you follow the steps below you should be able to have a basic understanding of how much
you need to have a lump sum (i.e. "your number"), how much you need to save regularly to get
, and what rate of return of asset allocation you need to get there.
A.) How to calculate "Your Number":
1.) Start with how much money you would need to live today. There are 2 ways to figure this
out: You could calculate your base expenses and spending budget or you could take a
percentage of your current annual income. (For this example lets assume I calculate that I
make $60,000 in salary annually. Rule of Thumb says you would use 80% of this number. So
my current living income for this calculation would be $48,000/year)
2.) Then determine at what age you would like to retire. How many years from now?
(EX: Lets assume I would like to retire 20 Years from today.)
3.) We need to determine an assumed interest rate. Most industry insiders will use an
interest rate of between 3-4%. (EX: To be more conservative in my calculations I will assume a
higher inflation rate and select to use 4%.)
4.) Using a Financial Calculator adjust your income from Step # 1 to create an inflation
adjusted income at your retirement age. (EX: Initial Deposit or Present Value/PV is $48,000;
End Date is todays date 20 years from now or N= 20; Rate of Return or i =4; remember to
compound annually. That equals an inflation adjusted income of approximately $105,000 at
my planned retirement in 20 years.)
5.) Now determine what other sources of income you might have at retirement. For
example Social Security or a company pension. (You can use the calculators at ssa.gov to
help determine what your Social Security payment might be) then subtract that amount from
the amount that you calculated in Step #4. ( Assume that I will have $30,000 annually in Social
Security benefits, then my income gap is $105,000 - $30,000 or $75,000)
6.) Take your future income number from Step #5 and divide it by .05 which will represent a
5% withdrawal rate on your investments at retirement ( or divide by .04 to be very conservative)
that result is the total amount of money you will need to retire, your number!
(EX: $75,00 divided by .05 = $1,500,000 which is what I'll need to retire in 20 years from now)
B.) How much do I need to save monthly to hit my "Number":
7.) Once you've calculated your retirement amount, you then need to select an assumed
rate of return for your investments. This part can be the most difficult, because you essentially
just making an educated guess, so here are some general estimates to use based on your
overall risk tolerance:
For Conservative Investors use an assumed rate of return of between 4-6%
For Moderate Investors use an assumed rate of return of between 6-8%
For Aggressive Investors use an assumed rate of return of between 9%-11%
(It is not generally recommended to long-term planning with returns in excess of 11%)
8.) Using your Financial Calculator plug in your data. Your Present Value is the current
amount of money you have saved. Your Future Value is "your number" for Step #6 from above.
Your N value or number of periods is the number of years until you want to retire. Finally, you I
or Interest amount is the assumed rate you decided from Step #7.
(EX: Assuming a 8% rate of return and a starting savings $100,000. My input data would be
PV = 100,000, FV = 1,500,000, N = 20, I = 8 then my calculation for PMT or payment would be
$22,600/year; then divide that by 12 or by the number of pay periods per year to determine
how much I needed to save monthly or per pay check to retire.) Don't forget about employer
match in your calculation, that will lower the amount you would need to save dollar for dollar.
This is just a general rule but will get you well underway to an understanding of what your
basic needs and goals should be to meeting your current retirement expectation.
Best wishes!