One of the most pressing questions many of us face as we approach retirement is whether we’ve saved enough. It’s crucial to ask this question early enough so that adjustments can be made if necessary. While sophisticated online calculators are available, sometimes simple, back-of-the-envelope calculations can provide a clear sense of your retirement readiness. Here, we’ll explore two straightforward methods to help you determine if you’re on track.
Method 1: Are your savings giving you a worry-free tomorrow?
Often when we save, we aren’t sure how much and what for? So, this first calculation involves totaling your current savings and all future additions to see how much income your future pot of money will provide you when you stop working. This method can be broken down into five simple steps:
- Current Annual Contributions: Start by adding up what you and your spouse contribute to retirement accounts annually.
- Years Until Retirement: Multiply your annual contributions by the number of years left until retirement.
- Total Savings: Add this figure to your current savings.
- Years in Retirement: Divide the total savings by the number of years you expect to be in retirement.
- Guaranteed Income: Add this amount to your expected income from guaranteed sources like Social Security or pensions.
Let’s illustrate this with an example.
Example:
Consider a couple, both aged 55, each contributing $7,000 annually to their retirement accounts. They have $150,000 already saved and plan to retire at 67, with an estimated retirement duration of 27 years (until age 94). The higher earner expects $2,200 per month from Social Security, while the spouse expects $1,100 per month.
Calculations:
- Annual Contributions: $14,000
- Years to Retirement: 12
- Total Contributions: $14,000 × 12 = $168,000
- Total Savings at Retirement: $168,000 + $150,000 = $318,000
- Annual Withdrawal: $318,000 ÷ 27 = $11,777
- Total Expected Income: $11,777 (savings) + $26,400 (Social Security) + $13,200 (spousal Social Security) = $51,377
The couple would then compare this $51,377 to their expected annual expenses in retirement to see if it suffices.
Method 2: Not happy with that first calculation???
If the first method shows you falling short of maintaining your current lifestyle, and that is your goal, the second method helps estimate how much more you need to save.
We use the 4% withdrawal rule as a foundation, that is, assume that whatever money you save, you can withdraw 4% of the total amount each year without fear.
In other words, this rule suggests that you can safely withdraw 4% of your retirement savings annually and never run out of money. In your calculations for required savings you would then use a 25 times factor. 25X 4%= 100%.
Example:
Suppose the couple above determines their desired lifestyle costs $75,000 annually.
Calculations:
- Income required from Savings: $75,000 – $39,600 (total Social Security) = $35,400
- Required Savings: $35,400 × 25 = $885,000
Given their current savings ($150,000), they need to save an additional $735,000 over the next 12 years.
Annual Savings Goal:
- Additional Savings Needed: $735,000 ÷ 12 = $61,250 per year
- Existing Savings: $14,000 per year
- Additional Required: $61,250 – $14,000 = $47,250 per year
This figure may seem daunting, but adjustments, such as paying off a mortgage, can significantly reduce the needed savings.
Mortgage Adjustment Example:
- Mortgage: $2,000 per month = $24,000 per year
- Adjusted Income Need: $35,400 – $24,000 = $11,400
- Adjusted Required Savings: $11,400 × 25 = $285,000
Thus, the couple would need to save an additional $135,000 over 12 years, translating to $11,250 per year, which is more manageable.
While these back-of-the-envelope calculations aren’t perfect—they don’t account for inflation or potential returns on investments—they provide a foundational understanding of your retirement readiness. For more detailed planning, sophisticated calculators from financial institutions like Charles Schwab can offer more tailored projections.
By using these simple methods, you can gauge whether your current savings habits are adequate or if adjustments are necessary, helping you move towards a secure and comfortable retirement.
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