To get a rough estimate, walk through five simple steps to come up with a simple yes-or-no answer.
5-Step Calculation for Retirement Saving
Here is an overview of the simple five-step calculation to determine whether you’ll have enough income and savings to cover your expenses in retirement. Answer these questions: When you are done with the calculation, compare the answer to your current annual expenses to see whether the amount projected is enough to cover the living expenses you normally have.
Example Using the 5-Step ‘Enough-to-Retire’ Calculation
Here’s a walk-through of the five-step calculation for a sample couple:
A couple, age 55. Each contributes the maximum amount to their IRA account every year, for a total of $14,000 of IRA contributions each year ($7,000 each). They have $150,000 saved already. They would like to retire at their full retirement age as defined by Social Security, which is age 67. Based on the output from a few life-expectancy calculators, they expect at least one of them to live to age 94, so they expect at least one of them to have 27 years in retirement. He will have $2,200 per month ($26,400 per year) in Social Security benefits, and she will collect half of this amount ($13,200 per year) as a spousal benefit.
Using their data, this is how the “enough-to-retire” calculation works: In this case, the $51,377 represents their annual expected retirement income. They need to compare this to their expenses to see whether it will be enough. If you aren’t sure what your expenses will be in retirement, make a retirement expense projection to come up with an estimate. This calculation is sufficient assuming both spouses are alive, but upon the death of the first spouse, the lower Social Security amount (in this case, hers) will go away. The higher amount will continue as a widow/widower benefit. However, certain expenses are also likely to go down upon the death of a spouse, such as healthcare and insurance costs, transportation, and utilities.
Objections to This Type of Retirement Calculation
Some will object that this simple enough-to-retire calculation does not take into account the growth rate of investments, or inflation. For the sake of simplicity, assume that a growth rate of safe assets is 3% and that inflation is 3%. Those two variables would then cancel each other out. It is impossible to accurately predict all of the variables that will affect one’s retirement income plan over a 30-year time horizon. More detailed planning is useful, but this simple enough-to-retire calculation method offers a great starting place.
What If You Don’t Have Enough?
Some people don’t want to do any calculating, because they are afraid of the answer. That is the ostrich approach. Don’t do that! It is far less stressful to do the math, face reality, and figure out an answer. Understanding your unique situation will allow you to prepare and adapt more easily than if you try to ignore it. If you run through the calculations and think you don’t have enough to retire, you can explore many options, such as working a bit longer, finding ways to earn additional money, finding ways to reduce expenses, or moving to a lower-cost area. All of these actions can help bring retirement within reach.
