
There are a lot of sites that help you determine how much you need to save for retirement to maintain your lifestyle. I have never been comfortable with them because they usually don’t share the logic behind their calculation. So I came up with the following 3 easy steps to calculate my own retirement needs.

Photo from stock.xchng
For example, let’s pretend my wife and I make $50,000 per year and save $15,000 a year for retirement. When we retire 30 years from now, we don’t need to save $15,000 a year anymore. Therefore, we only need $35,000 per year.
However we want to improve our lifestyle during retirement, so we are going to bump it up to $40,000 per year.
I need $40,000 per year
Now we have to adjust that $40,000 for inflation. For this example, we assume inflation rate is 3.5% per year. We accomplish this with the following formula:
Inflation Adjusted $ = Today’s $ * ((1 + inflation rate)^ Number of years to retirement)
Inflation Adjusted $ = $40,000 * (1.035 ^ 30)
Inflation Adjusted $ = $113,000 (rounded up)
I need $113,000 per year after inflation
Retire Early suggested that the safe withdrawal rate is about 4% according to various studies (i.e., Bengen Study, Harvard Study, and Trinity Study). Now the formula:
Retirement Needs = Inflation Adjusted Income * 25
Retirement Needs = $2,825,000
I need to save $2.8 million to begin retirement
More on retirement investing and planning:
This article was featured in the 120th Carnival of Personal Finance hosted by My Retirement Blog.

All posts by Pinyo
Comment Rules: Constructive criticism is welcomed. Please use your PERSONAL name or initials and not your business name or URL, as the latter comes off like spam and I'll most likely delete your comment. Have fun and thanks for adding to the conversation! Here's our comment policy and guidelines.
If your trackback does not show in 24 hours, please resend to this trackback URI.
| High Interest Savings Accounts | 1.51% |
| High Yield CDs (1-year) | 1.75% |
| High Yield Checking Accounts | 1.46% |
| Best Credit Card | TrueEarnings® |
| 0% APR Balance Transfer | 6 mo |
| Lowest Interest Rate | 9.75% |
| Best Cash Back Reward | 5% |
This site contains information about third party products and services, such as credit card offers, online banking, discount brokers, and credit score services. While we endeavor to ensure that the information presented on this site is accurate at the time of publication, any offers and rates shown on Moolanomy can and do change without notice. Visit the official site of the offer for up-to-date information.
For additional information, please review our Terms and Conditions.
Ah – I see retiring as a last resort – lol. So you know I half-heartedly put anything into my 401k… ^_^
I am not sure what you mean.
For me, the only thing that would stop me from contributing to 401k is if it delays my retirement. For instance, if I can reach financial independence by age 45, but can’t access my money until 55 because it’s all in 401k — then I still have to work 10 more years.
I don’t see interest included in the calculations here. Even at 4%, *just the annual interest* on 1.8 million will cover your annual needs. Not that that’s a bad thing, you’ll still have 1.8 mil left when you die. If you plan to use up all your money in retirement the necessary amount would be quite a bit lower.
@Elaine – Welcome to Moolanomy. No, I didn’t include it, nor mentioned that most people will have to invest for another 20 years during their retirement. I was just trying to keep it simple
Many people forget to adjust for inflation and I’m glad you’ve pointed this out. That’s why final slary schemes are great because the adjustment is already made, but in private pension planning you definately need to do this.
@ Elaine – You earn 4% on your money and before you get to spend any of it, Mr Inflation ’spends’ 3.5% for you … can YOU live off just 0.5% of $1.8 Million?
I’ve done a spreadsheet and put it up on Google Docs at:
http://spreadsheets.google.com.....utput=html
There’s a column there headed “Factor” which makes the calculations a bit simpler.
So now you can find your retirement needs in one step.
Find the row with your number of years to retirement, grab the “factor” value, multiply it by the amount you want in the first year of retirement, and there you are.
For example, 35 years to retirement has factor 98.65, so if you want $70,000 then its:
98.65 * 70 000
If you want 50,000 then its:
98.65 * 50 000.
I hope this helps.
Click “CamKC” if you’d like to see my finance blog.
—