How Much Is Enough for Retirement Savings? (How to Set Your Personal Retirement Number)

Here are some thoughts from Kiplinger's on various ways to set your personal retirement savings number:

A conservative rule of thumb suggests that if you withdraw only 4% -- or one twenty-fifth -- of your retirement nest egg during the first year and adjust subsequent annual withdrawals to compensate for inflation, you'll never outlive your money. Another approach is to estimate how much you'll need to withdraw from savings during your first year of retirement and multiply that amount by 25 to determine your target number. For a bare-bones budget, you'd need only half as much, or 12.5 times your initial withdrawal. Your personal number is probably somewhere in between.

It's a basic way of setting a number, but it does give you a range to consider (and believe me, it is a range -- there's a big difference between the "25" number and the "12.5" number.)

Also be sure that when you set the amount you'll need in year one that you adjust for inflation. For instance, if you need $50,000 in today's dollars, you'll need a heck of a lot more in 25 years.

Finally, you'll need to subtract (if you want to) any amounts you expect to get from Social Security. Personally, I'm estimating getting nothing from Social Security so any amount I do get will be a bonus.

For those of you who would like an example, here goes:

• Let's say you think you'll need $50,000 a year in income in today's dollars when you retire in 20 years.
• If you assume inflation of 3.5%, that means you'll need annual income of $99,489 when you retire.
• Multiply $99,489 by 25 to get the high-end of your retirement savings need: $2,487,225.
• Multiply $99,489 by 12.5 to get the low-end of your retirement savings need: $1,243,613.

As I said, this is a very simplistic way of setting your retirement number, and I'll be reviewing a few more-advanced methods in the next few days.

Comments

[Lord]

I can get by on 5 years income and 12.5 years income would be sybaritic luxury for me, but that is the difference between income and expenses.

You are really better off forgetting about inflation and considering values in current dollars and real rates of return. Saying you need 2.5M in 20 years is meaningless because you have no idea what that translates into in current dollars other than it is sufficient to provide a 50k standard of living. If you know what you need in current dollars, you have a much better grasp of how much that is.