The Basics: How to Calculate What You’ll Need to Retire

By Admin Prepare

September 24, 2017

How do you figure out exactly how much you need to retire? It's not easy. Well, it starts out easy, but then it gets pretty complicated. The easy part is coming up with a theoretical number to start with, which involves a lot of assumptions and estimates. The complicated part is how to estimate or assume for real life, which can trick us into thinking things will always be fine or terrible even though we have no idea what's going to happen.

Still, if you can ignore "the unknowable," you can come up with a perfectly reasonable retirement number. Here's how.

What's Your Retirement Lifespan?

You start by estimating how many years you will live in retirement. Talk about the unknowable, right? But look at the average life expectancy for someone of your age and gender, plus consider the ages at which your grandparents or parents may have passed away and you may get a sense of your own lifespan. Factor in what age you expect to retire. For example, if you hope to retire at 65 and you think you will live to 85, then you expect to live in retirement for about 20 years. You could live on well past 85 or not, but, for now, you have a goal to start with.

What's Your Retirement Salary?

The next thing you want to estimate is how much of today's income do you need to live on. In retirement, you may be able to cut expenses (by getting the kids raised, downsizing the house, or eliminating debt including the mortgage) and live leaner than you do now, or you may want the same standard of living you currently have.

At a minimum, you should plan on needing 80% of your current income, an even better rule of thumb is 85%. Or you may be set on 100%, shooting for a higher standard of 120%.

Say Jaime makes $50,000 currently. After creating a budget, she decides she could actually live on $40,000, so she sets her retirement goal at 80% of her current income.