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

By Pinyo, on April 12, 2011

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.

Leave Your Comment (30 Comments)

1. Marci Konopa says:

   December 27, 2012 at 6:21 pm

   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)

   Reply
2. Suresh says:

   December 10, 2012 at 10:51 pm

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

   Reply
3. Karen says:

   September 5, 2012 at 11:35 pm

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

   Reply