Yesterday, I gave a simple method for setting your retirement number. Today, we're going to take the sophistication level up a notch with a suggestion from Kiplinger's on a more advanced way to set your personal retirement number. Here's an example they provide:
- Age: 45
- Current Gross Income: $75,000
- Projected Gross Income Before Retirement (Assuming current salary increases of 1.5% each year until age 65): $99,521
- 85% Retirement Spending Need Estimated: $84,593
- Social Security & Pension Income (Social security income of $19,380 based on Social Security Administration data plus a hypothetical pension income of $25,213.): $44,593
- Potential Income Gap to Be Funded by Assets: $40,000
- Multiply Income Gap by 25 to Arrive at the Number: $1 million
Not a bad method for getting a "rough" estimate of your retirement number, but here's what I would do differently:
1. I'd estimate more than a 1.5% annual salary increase. If this is all you get for the next 20 years, then: 1) you're doing something wrong in managing your career and 2) you're losing big ground to inflation in those 20 years. I'd at least use 3.0%.
2. I use 100% instead of 85% as the amount of income I'll need at retirement as a percent of my current salary. Why? Because of the wildcard of health costs -- there seems to be no end to them increasing. Besides, I prefer to be conservative, so if this change gives me more money than I'll need, that's fine.
3. I'm counting on zippo from Social Security. If I get $1, that will be $1 more than I expect.
Put all these together, and here are the new numbers:
- Age: 45
- Current Gross Income: $75,000
- Projected Gross Income Before Retirement (Assuming current salary increases of 3.0% each year until age 65): $135,458
- 100% Retirement Spending Need Estimated: $135,458
- Social Security & Pension Income: $0
- Potential Income Gap to Be Funded by Assets: $135,458
- Multiply Income Gap by 25 to Arrive at the Number: $3.4 million
Yes, my assumptions make a big difference and could be viewed as fairly conservative (especially on the Social Security issue), but you don't get a second chance to save for retirement. It's better to have more saved than you need than it is to get to retirement and realize that your standard of living needs to drop significantly for you to survive.
For tips on saving for retirement, see these posts:
Comments