How Much Money Do I Need to Retire? Figure Out in 3 Steps

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. It is important to note that these steps do not take into account all the little caveats that may be unique to your situation; however, the method does offer a good starting point for your retirement planning.

Photo by photosteve101 via Flickr

Determine Your Retirement Needs

Step 1: How much do I need today?

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 TODAY

Step 2: Adjust for inflation.

Now we have to adjust that $40,000 for inflation. For this example, we assume an average inflation rate of 3.5% per year (I know this is a big assumption). 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 30 years from now (inflation adjusted)

Step 3: Multiply by 25

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

Things to Consider

  1. This calculation assumes a retirement age of 65. I haven’t explored other variables. This is just a quick estimate.
  2. This doesn’t say anything about how to get to the number in step 3 — it takes time and effort to save for retirement.
  3. I didn’t take into account any income that you might have, e.g., job, Social Security payments, pension payments, etc. As such, if you have money coming from these sources, you can lower the calculated number in step 2 by subtracting these amounts from the Infaltion Adjusted Income.
  4. Likewise, I didn’t take into account additional expenses, e.g., healthcare. You can account for these expenses, by increasing the Infaltion Adjusted Income.

About the Author

By , on Apr 12, 2011
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

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Leave Your Comment (32 Comments)

  1. Sanj says:

    For how many years of retirement is your formula (answer) in Step 3 assuming?

  2. Marci Konopa says:

    If you begin saving at age 25 and want $2.8M in retirement at age 65, based on a 7% savings interest rate and monthly compounding interest, you will need to make contributions of $2394.28 each month. At a salary of $50,000 and assuming a 20% tax rate, you have a net pay of $939 per month to live off of. Good luck!

    (These calculations don’t take into account increasing income or contributions)

  3. Suresh says:

    Pinyo, I could not understand the multiplification factor of 25. Can you pls explain.

  4. Karen says:

    For how many years of retirement is your formula (answer) in Step 3 assuming?

  5. Karen says:

    I’m trying to figure my amt and don’t know what the symbol between 1.035 and 30 means in the formula in Step 2. It doesn’t seem to be multiply, divide, or add, and my math skills are too weak to back into it. Thx.

  6. Luis says:

    Pinyo, I have always noticed that the downside to these “how much I need to retire” calculations assume you will be receiving no more income when you retire therefore you need a very large pile of money.

    However, if part of your retirement plan is also how to accumulate assets that produce income (i.e. real estate) then that pile of money does not need to be so large and/or you can retire earlier than you think.

    • Pinyo says:

      @Luis – Good point. May be I should make that more clear than just a bullet point in the note section?

      • Luis says:

        No, I think you wrote it fine and when you think about it this point by itself can be a whole other article. I see you mention SS, pensions, etc. but don’t forget that income from a business that you created during your “full time” years and that now you are retired from can be maintained through retirement on a part time basis or less…

  7. SansMoneyStress says:

    This is a straightforward outline that I’d like to send around to a few people as well. However, it adds to the angst of the entire retirement saving process. So many people avoid this topic because of those projections, let alone taking into account inflation. The amount of fear and stress around planning for the future is unbelievable.

  8. $2.8 million saving for retirement… That sounds like some serious discipline might be required to reach that goal.

  9. Pinyo says:

    @Raaj – The answer is depend. I think it’s a wiser decision to buy investment property with positive cash flow upfront (instead of depending on appreciation that’s above inflation). There are plenty of people who got the opposite result with investment properties in the last decade.

    @Mike – It looks like you are in a great shape. Your SS and pension already put you ahead of most people. The $1 million and your home are good safety net on top of the income. You and your wife will be living for a long time, so it’s worth consulting a financial planner who can help make your money last yours and your wife’s life-time.

    @GenerationY – It’s not easy, buy you can do it if you save regularly for the next 40 years and invest wisely. Another important thing to do is keep looking for ways to increase your income and keep your expenses under control.

    @Jeff – I partially agree with you. I think it’s smart to seek out new ways to increase your income (e.g., start your own business), but you shouldn’t forsake saving for retirement just because the economy/market haven’t grown for the last 10 years.

  10. Jeff Smith says:

    Retirement plans are great idea, but only in a very prosperous economy. My High Yield account has barely made 5% over the past 10 YEARS. I think investing in a business that will make you money and give you a little job security is a better idea. Brokers and people with a LOT of money in the market are the only ones that can generate lots of revenue-with large capital.

    I was in the military 1998 and they were trying to sell us on investing in US Savings bonds saying if you bought one a month ($100) starting at 18 years old at 55 you could retire with 1 million in the bank- but bonds are doing bad too. Only real way to make money is to save it and use wise and not finance and use credit for everything.

  11. GenerationY says:

    How on Earth are you suppose to save $2,825,000? If you start your 401k at 25. How much a month should you put in it to get to that amount?

  12. Mike says:

    I am not sure how to use the spreadsheet simple calc as all my yearly expenses are covered by Social Security and pensions that amount to $65000 a year. I intend on retiring at 62 – 2 years from now. My retirement savings is just over $1,000,000 not including my home. I have 3 annuities out of the $1M about $300k that will start paying out in 10-12 adding maybe another $20K a year. I am hoping I still have enough in my nest egg to cover it all? Does anyone see problems with it. I am currently unemployed but wife is still working.

  13. Raaj says:

    I guess the value for the property would also increase with a much higher growth rate (Property’s Capital Growth). So paying the mortgage and selling off at the required retirement amount within the next 35 years would be easier. I know a family who bought a 3 flat investment property near a university for $35,000 (on mortgage though) and after 15 years retired and paid off $10,000 from Pension and is currently earning $3,000/month rental income and the property can be sold in market today for close to $500,000. I guess property investment is wiser for faster and permanent growth. Though the journey will be up and down but you will make it up with properties final sale. Thanks and all the best people.

  14. Steve says:

    The SWR study only looked at a 30 year period. If you are retiring at 45 you need to use a lower number.

    Investment returns typically aren’t 8.5% year in and year out. That’s why they studied what would happen in various sets of years. And why you can’t just spend 5% and call it good. Unless you are ready to lower your standard of living if the market goes down, you need to leave yourself a buffer against risk.

    • Kevin Mulligan says:

      @Steve: True, but a lot of times I think it is easy to get caught up in the details when just doing something would be the best move. Getting over that initial inertia is better than doing nothing, regardless of 8.5% or 5.5% returns.

  15. Phil Benincasa says:

    Here is an easy way to adjust for inflation and calculate your nest egg in today’s dollars. Simply estimate inflation, and subtract that from your projected growth rate of your money. So for example if you project inflation to be 3.5% adn your money growth rate at 8.5% then use the future value calculation with a growth rate of 5%. That gives you inflation adjusted value in today’s dollars.

    • Pinyo says:

      Phil. That’s a great way to do it. It also quickly shows you that long term investments that grow slower than inflations are not good investments at all — for short-term yes (but not long term)

  16. This is the simplest and most easily understandable demostration of caluculating how much money is needed for retirement I have ever seen.
    I think simple is crucial because more people need to make this calculation (everyone should). Simple is really all you need because the variables require assumptions that make detailed calculation no more accurate than a simple one.
    Thanks you.

  17. Jon says:

    My money number is 3 million baby! I’m easily hitting 4 million if I stay the course with my current contributions. Index funds baby, the only way to go. Like others have said, most people don’t think about the interest alone with this much money. Think about it, how much do you really need, you’re old, will you really need that much anyways?

  18. sudan says:

    Most of the time when death of a spouse, the financial situation get change.That’s why we should set our goals and objective and then start doing the planning upon it. Then we need to calculate our total income, then start saving as soon as possible. if you can’t save as much as u want then don’t panic,there are many ways to improve your financial situation. plan for a exit strategy. Analise on the related topic and try to get the solution. Always try to gather data. By follows these step people can live happy after retirement. we should also update our income time line and review the insurance plan.

  19. CamKC says:

    I’ve done a spreadsheet and put it up on Google Docs at:

    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.

  20. Jonathan says:

    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.

  21. Elaine says:

    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.

    • Pinyo says:

      @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 🙂

    • AJC says:

      @ 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?

  22. Millionster says:

    Ah – I see retiring as a last resort – lol. So you know I half-heartedly put anything into my 401k… ^_^

    • Pinyo says:

      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.

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