How’s Your Financial Fitness?

Estimate How Much You Need to Save for Retirement

Now that you have a clearer picture of your retirement goal, it’s time to estimate how large your retirement nest egg will need to be and how much you need to save each month to buy that goal. This step is critical! The vast majority of people never take this step, yet it is very difficult to save adequately for retirement if you don’t at least have a rough idea of how much you need to save every month.

There are numerous worksheets and software programs that can help you calculate approximately how much you’ll need to save. Professional financial planners and other financial advisors can help as well. At the end of this booklet, we provide some sources you can turn to for worksheets.

Regardless of what source you use, here are some of the basic questions and assumptions the calculation needs to answer.

How much retirement income will I need?

An easy rule of thumb is that you’ll need to replace 70 to 90 percent of your pre-retirement income. If you’re making $50,000 a year (before taxes), you might need $35,000 to $45,000 a year in retirement income to enjoy the same standard of living you had before retirement. Think of this as your annual “cost” of retirement. The lower your income, generally the higher the portion of it you will need to replace.

However, no rule of thumb fits everyone. Expenses typically decline for retirees: taxes are smaller (though not always) and work-related costs usually disappear. But overall expenses may not decline much if you still have a home and college debts to pay off. Large medical bills may keep your retirement costs high. Much will depend on the kind of retirement you want to enjoy. Someone who plans to live a quiet, modest retirement in a low-cost part of the country will need  a lot less money than someone who plans to be active, take expensive vacations, and live in an expensive region.

For younger people in the early stages of their working life, estimating income needs that may be 30 to 40 years in the future is obviously difficult. At least start with a rough estimate and begin saving something -- 10 percent of your gross income would be a good start. Then every 2 or 3 years review your retirement plan and adjust your estimate of retirement income needs as your annual earnings grow and your vision of retirement begins to come into focus.

How long will I live in retirement?

Based on current estimates, a male retiring at age 65 today can expect to live approximately 17 years in retirement. A female retiring today at age 65 can expect to live approximately 20 years.

These are average figures and how long you can expect to live will depend on factors such as your general health and family history. But using today’s average or past history may not give you a complete picture. People are living longer today than they did in the past, and virtually all expert opinion expects the trend toward living longer to continue.

What other sources of income will I have?

Since October 1999, Social Security has been mailing statements to workers age 25 and older showing all the wages reported and an estimate of retirement, survivors and disability benefits. You can also request a statement by visiting the Social Security Administration’s Web site or by calling 1.800.772.1213 and requesting a free Social Security Statement.