How Much Dough Does A Roller Need to Retire?

A simple question, with such a complicated answer. Just how much money do you need to retire?  The short answer is that you should certainly have enough in savings to bridge the gap between your retirement income and expenditures.

Trouble is, that it can get complicated pretty quickly.

First, you’ll need to figure out an approximation of how you’ll spend each year you’re in retirement.  You’ve got to estimate how much you’ll make in retirement income, and then think about how those numbers will change due to inflation.

We’re going to simplify these with the “Rule of 25.” Essentially, we’ll figure out how much money you’ll need in your first year of retirement.  Then, multiply it by 25.

Provided that your retirement nest egg isn’t stashed under the mattress, it will hopefully keep pace with inflation. (Some estimates call this a lofty goal, and suggest saving half this number and buying an annuity.)

First, let’s assume you’re a typical married American, in a household bringing home a reasonably average $80,000 per year. We’ll also assume you’ll take home a low amount of social security benefits, around $20,000 per year. (You can increase this number by staying on the job just a few more years.  If you decide to retire at the age of 70, your social security benefit can increase sharply … around 80%.

Now, we’ll take a second to estimate your income needs.  Despite what you might think, most people spend just as much during their retirement years as they do before.  Sure, you’ll spend less money commuting but you’ll also find yourself looking for ways to fill your time. Chances are you’ll spend a bit more on travel or new hobbies.

Most experts recommend planning to spend 75-85% of your pre-retirement expenses. In our scenario, you’re probably taking home about $60,000 after taxes. We’ll use a middle number, 80% of that, for $48,000. We’ll subtract your expected social security payments of $20,000, and arrive at an expected gap of $28,000. Multiply by 25, and arrive at your target of $700,000.

Because they’re becoming less abundant, we’ve assumed you won’t have a pension coming. But, if you’re a government employee or otherwise expect a pension, make sure to subtract that number from your salary gap before determining your savings needs.

Now, all this assumes that you will more or less maintain the same lifestyle you are currently living.  But if you expect that lifestyle to shift, make sure to plan for it.

If, for example, upon retirement you plan to move away from an expensive city, plan for lower expenses. Also, if moving means selling an expensive city home and buying a cheaper one somewhere else, plan for a nest egg that will get a sizeable bump when you trade your home for a less expensive one.

If you plan on finally traveling the world over, plan for those expenses. Plan to spend money on your new-found passions: ballroom dance lessons, fly fishing, online poker, or whatever might fill your time. Finally, however much money you need, and however young you are, don’t let it stop you from saving today!

Published or Updated: April 4, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Ralph says:

    It also has to do with how much money you will need if you are going to drive, and eat and the other necessary things that people do everyday. With prices steadily eroding purchasing power for everyone, even a well funded retiree didn’t count on the continuous cycles of recession wiping out his 401K or IRA savings, or gas and food prices eating away at his nest egg. Most people of retirement age will have to keep right on working if they don’t want to starve, and if, and that is a big if, they can even find a job.

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