1. Crunching the Numbers
How much do you need to retire?
by H. Bradley Bertrand
Back at the turn of the 20th century, life expectancy in the US was a mere 49.2 years old. Recent studies
show that life expectancies have risen dramatically since then and can reach well over 80 years old
today. If you plan to retire at 65, that is quite a long time you will be in retirement.
For most of us, life would be ideal if interest rates and dividends would reach the point to cover all of
our expenses. But in the imperfect world of inflation, income needs to be reinvested in order to
replenish starting capital every year, to build our retirement nest eggs.
A snapshot of to today’s retirement model includes nearly 80% of employees participating in work-
based retirement plans and 42 million people are active members of 401k plans. Additionally, more
than 77% of retirees and those approaching retirement age, account for the county’s financial assets.
That being said, nearly $13 trillion is being invested in a variety of public and private investment plans.
So then, how much will you need to retire? No one can predict as to how long you will live, what your
financial needs will be or the interest rates between now and then. It all depends. It depends on how
old you are, on your job and your lifestyle. Though there is no magic number to calculate how much you
will need for retirement, there are a few classical methods that could be taken into account.
15% savings
For young workers under 35, a good rule of thumb is to save about 15% of your gross income, so that
more than 50% of your salary can be replaced in retirement. By integrating 401k contributions,
company matching programs and contributing to a Roth IRA, this will set a solid foundation for your
retirement years.
80%
To maintain your lifestyle after retirement, about 80% percent is the amount of (net) pre-retirement
income that you should target to be replaced with a combination of Social Security, personal savings and
a pension (if you’re lucky to have one). For example, if you are making $100,000 a year, you’ll need
$80,000 per year of pre-tax income during retirement.
$1 million+
Aim high with at least one million dollars in your retirement portfolio. It may seem that this amount is a
fortune, but remember that inflation does erode savings over time. Estimate future inflation and make
sure that your income will always cover your inflation-adjusted expenses.
One good retirement instrument to use to stay on track is fixed indexed annuities with income riders.
These vehicles provide the potential for gain, protect against loss and assure growth for the purpose of
providing future income. However, if you make any withdrawals before you’re 59.5 you’ll get socked
with income tax and a 10% IRS penalty.
2. The 4% Rule
This approach suggests that if you withdraw only 4% of your savings in your first year of retirement, and
adjust for inflation in subsequent years, you’ll never outlive your retirement nest egg. The logic behind
the 4% rule is that if you earn 8% a year you’ll keep up with spending and inflation. Four percent stays in
savings to keep up with inflation, and 4% comes out to pay for your living expenses. The problem is that
earning an average of 8% per year may be challenging. Over the past decade the S&P 500 Index has
yielded an inflation-adjusted -3.5% annualized return and the next decade may be as or more
challenging from an investment perspective.
The Rule of 25
You can also estimate how much you’ll need to retire by taking the amount you estimate you will need
during your first year of retirement and multiply that by 25. This will provide a rough estimate of what
you will need for a comfortable lifestyle during your golden years.
Conclusion
Despite whatever approach you use, the key is to work towards a goal and have a plan. With all this
being said, it is always best to start early, and if not early, then now!
