This is a question that comes up with young professionals, mid-career professionals, and people about to retire. Everyone wants to know what is the magic number that one needs to have amassed before they can retire comfortably. The problem is that the number is different for each individual.
On top of tax concerns, social security issues, and income vs outgo histories, you also have to think about lifestyle. Most people have some idea, even if it ends up being wrong, about what they’d like their retirement years to look like. To get a ballpark figure I’d suggest:
#1 Take a look at the actuarial charts to find out how long you might live.
Of course none of us knows when our lives will be over but drawing from social security records, actuarial tables can help you get an idea of if you should plan to be in retirement for 20 years or 40 years. This simple calculator is a great place to start.
#2 Take a look at your Social Security Administration account.
Think about when you’d like to start drawing social security and how much you might be getting. Things like who applies first, if you’re married, and how far away you start drawing from when you reach full retirement age matter. Visit the Social Security Administration’s calculators page to start.
#3 Consider how much you live on right now.
One of the many challenges of trying to decide how much money you might need to be able to retire is not knowing how expenses will rise and fall over time. Some thinking says that early in retirement, you’ll spend on leisure activities (travel, golfing, etc.) while later in retirement you’ll spend those same dollars on healthcare. Whatever you spend in a year right now, use that as a base number to think about how much you might spend in retirement.
#4 Do the math.
Since you already how many years you should be planning for, how much you can expect to earn from Social Security, and what your yearly spending is now all you’ve got to do is a little simple math.
First, subtract how many years the calculator said you may live until from the age at which you want to retire. Example: My calculator says I’ll live to be around 94 year old. If I plan to retire at 70:
94 – 70 = 24 years in retirement
I need to plan to be in retirement for 24 years.
Next, let’s find out how much I can expect to get from the Social Security Administration. I used the quick estimator and saw that I’d earn $1.360 per month in retirement. That’s about $16,320 per year.
$1,360 x 12 months = $16,320 per year from Social Security
Next,consider how much you’ll need to have invested. Let’s say that I spend $70,000 per year. I just learned that I’ll get $16,320 per year from Social Security. That means I’ll have to have $53,680 per year of money I’ve invested.
Lastly, multiply the number of years by how much you spend in one year. Example: I’ll need to prepare for 24 years (from the example above) and I spend about $53,680 per year.
$53,680 x 24 years = $1,288,320
I need to have access to $1.2 million dollars. That sounds like a lot of money. Let’s further assume that I have nothing invested. Nada. This calculator will help you figure out how much you need to start aggressively investing.
If you’re a young professional and would like to better understand how to get started on the right foot check out my book 10 Things College Students Need to Know About Money. If you’ve already made a few mistakes, check out my best selling book Money Matters: The Get It Done in 1 Minute Workbook.
Regardless of where you are starting from, remember that building the life you want IS possible. Don’t worry about what you didn’t do before. Start from now. You can do it.
Shay Olivarria is the most dynamic financial education speaker working today. Previous clients include: SCE Credit Union, American Airlines Credit Union, the Yorba Linda Water District, Verizon, among others. She has written three books on personal finance, including Amazon Best Seller “Money Matters: The Get It Done in 1 Minute Workbook”. Shay has been quoted on Bankrate.com, FoxBusiness.com, NBC Latino and The Credit Union Times.The 2nd edition of “10 Things College Students Need to Know About Money” is available now.