Part of any good budget is making a monthly retirement savings contribution. To do so, you need to know how much money you’ll need to retire. Today, we’ll discuss how to calculate the amount of money you’ll need to retire, and we’ll also provide you with a free retirement calculator worksheet that you can download and use to help you create that estimate.
For starters, there are several figures you’ll have to think about before you can arrive at a retirement figure. Here are those factors. All of these figures will be inputs into the retirement calculator spreadsheet.
Income During Retirement. You’ll have to estimate how much money you will need the first year of retirement. This is easy if you are close to retirement, but the further away you are, the more difficult it will be to estimate. That’s because the cost of living will change more over a longer period of time. Let’s say that you are living comfortably on $50,000 now, and that you plan to retire in 20 years. To arrive at the amount of money you’ll need to live on in twenty years, I suggest taking the $50,000 and compounding it forward twenty years. Assume a cost of living increase of about 3% each year, which is the historic long term inflation rate. That would mean that an equivalent to $50,000 in 20 years would be $90,300. The formula to compute this is $50,000 x 1.03^20. Before you enter the gross amount of money you’ll need into the retirement calculator, make sure that you subtract any annual income that you expect to receive from social security, life insurance, or any pensions that you may have earned. The figure that you enter in the retirement worksheet will automatically grow at the rate of inflation, so you only need to estimate your first year’s income.
Life Expectancy. The next figure you’ll need to arrive at before you can make a retirement estimate with the worksheet is your life expectancy. This is the number of years that you will be retired. And since no one knows how old they will live, it makes sense to estimate that you will live to 100, just to be safe. So, if you would are planning to retire at 50, you could estimate that you have 50 years of life expectancy. In other words, you’ll need to save enough money to make 50 years of withdrawals from your retirement savings. If you are planning to retire at 65 and think that 90 is a reasonable assumption, then you would estimate 25 years life expectancy in this model.
Rate of Return. Next is the rate of return that you expect to get on your retirement savings during retirement. Most people invest somewhat conservatively during retirement, so depending on your philosophy and investment style, this could vary dramatically. For example, I know people that only have their retirement money in CDs, that are currently earning only 1-2%. Most people should keep their money invested in at least 50% equities during retirement, especially early on in retirement. If you plan to do this, then you can enter a higher percent. Depending on your style, anywhere from 2 to 8% is a reasonable assumption.
Inflation Rate. The inflation rate is also taken into account in this retirement worksheet. The inflation rate will effectively increase your annual withdrawal each year of retirement. Over the last several decades, the US inflation rate has averaged very close to 3%. If you feel that inflation rates on retirement needs like long term living and healthcare are rising faster, then you could use a higher number. However, most elderly people actually curtail their spending the older they get.
Download the Retirement Worksheet
You can download the retirement calculator here:
Let’s walk through a quick example of how to use it. Let’s assume you will need $75,000 during year one in retirement, that you will be retired for fifty years, that you will earn 6% during retirement and that inflation will remain at 3%. After you put all of these assumptions into the calculator, the result is that you will need to save $1.9 million. But don’t stop there. Change your assumptios and come up with a broad range of estimates. For example, use higher and lower income rates and investment returns to figure out what would happen if you needed more money or were able to live on less. Cutting back on your retirement income can significantly reduce how much money you’ll need to save for retirement. And don’t forget to subtract out any social security or pension income from your retirement income.
I hope you find this retirement spreadsheet helpful. If you have any comments please share them below.