Do you know how much you need to save in order to retire with an income of $100,000 per year? By the end of this post, you’ll have a good idea on the answer to that question. Then you’ll be able to figure out how much you’ll need to save each year to get to that number, depending on your current age.
How Far Away is Retirement?
Before you can determine how much you’ll need to save in order to have $100,000 of income available to you each year during retirement, you first need to decide if you need that amount now. Is your retirement date this year or do you still have a few years to go? If you’re 62 and planning to retire this year, then, yes, for purposes of our illustration you’d need that amount now. But if you’re only 57 and have five years to go until retirement, you’ll actually need to plan for $116,000 in income each year. This is because of inflation. What $100,000 looks like this year, will actually only feel like $86,000 in spending money five years from now. My estimation is based on the general estimate of 3 percent inflation per year. It could be more or it could be less, but we’ll keep it at 3 percent for now.
Now, if you’re 52 years old and planning to retire 10 years from now at age 62, that $100,000 should really be $134,000 per year. So, the first question you need to answer is how many years out is retirement?
If you’re five years away, take the amount of income that you need to retire, for our purposes in this post we’re using $100,000, and multiply it by 1.03 five times. This gives you the grossed-up, inflation-adjusted number for how much income you’ll need each year during retirement.
What Other Income Will You Have in Retirement?
In order to know how much you’ll need to have saved before retiring, you’ll also need to consider what other income you will have available to you at that time. This includes sources such as Social Security, pensions, or annuities. For our example, we’ll assume you can draw from Social Security, however, you have no pension or other accounts. Social Security will be around $2,100 each month. Per year, that rounds to around $24,000 of expected income. The rest you will need to make up from your investments. For a 62-year-old who is retiring this year, instead of $100,000, you’ll need to pull $76,000.
Now that we know that number, we can determine how much you’ll actually need to have saved as a nest egg?
A Word of Caution
Before I jump into the numbers, I just want to prepare you. These are assumptions. Don’t make any decisions based on the numbers that we go over here. I hesitated in even sharing this post because when I reveal the number, there’s a good chance that you’re either going to feel great, if you have more than the total amount saved, or you’re going to be under the number, and it’ll get you down.
So, before we do any more calculations or reveal any numbers, I encourage you to play stoic in this situation. Whether you’re above or below the estimated amount, you came here to get some information. Plan to leave with at least one thing that you might try to improve, or one thing that you might be able to hone in on. Coming up with your specific number that you need to save is a great conclusion, but whether your number is above or below what you have, you can take action to prepare yourself even further.
And the last thing I’ll say about this before moving on is that these assumptions don’t factor in many important parts of your plan. If you have a relationship with a good advisor, or if you’re a DIY retirement planner, then you should already be doing a lot of things that are adding additional returns to you investment, which will increase the rate of your success. Much of it has to do with your income, withdrawal plans, taxes, and how you’re invested over the next few years.
Some other additions that could improve the impact of your plan, especially if you have many years left before retirement are:
- systematic rebalancing,
- low-cost investing,
- tax-loss harvesting, and
- asset location and allocation
So, How Much Do I Need to Save?
If we were to use the rule-of-thumb 4 percent rule of withdrawal (again, your needs might be different, but this is a good place to start for this example) for a 62-year-old who needs $76,000 each year, you would need to have $1.9 million saved as a nest egg. This assumes that you withdraw 4 percent from your savings each year, plus receive Social Security. Together those two funds add up to $100,000 each year.
Next, we’ll use this same 4 percent assumption for a 57-year-old who has five years to go until retirement. At 3 percent inflation, you’ll need $112,000. Considering the $24,000 from Social Security, the annual need is $88,000. To determine your nest egg, divide 88,000 by 0.04 to see you’ll need around $2.2 million saved.
There’s More To Your Plan Than Just This Number
Please remember that there’s a lot missing when you use general assumptions. As I already mentioned, withdrawal planning can really impact your taxes, for example. A good financial advisor will help you avoid some of the pitfalls of using rule-of-thumb numbers.
Also, this total nest egg number is not all there is to creating a retirement plan. There’s a lot missing when using these simplistic models and assumptions. These models don’t consider things like:
- withdrawal strategy,
- how to pay less in tax,
- what you should be doing each year to improve investment returns, and
- how you can be prepared for unexpected events without having too much of your assets in cash.
There are many moving pieces and a lot of things to think about when it comes to retirement planning.