How Much Will You Need to Retire

Have you ever thought about how much will you need to retire?

I just found out that I need $1.8 million to retire!

Hold up, what?

Based on my calculations, to maintain my current standard of living, I will need to have $1.8 million at the ready to last me at least 30 years of retirement. So if I retire at 65 and presumably live until 95, that is the money I will live on. Luckily, (hopefully) not all that money will come from my 401k and savings. Some will come from social security and a tiny portion will come from a tiny pension that I have.

And, of course, there are certain things that may also need to be taken into consideration. If, for example, you decide to sell your home as you near retirement and get set up in a senior living community such as, then that amount will shift. Planning is essential, but you also have to be aware of what to do if something changes or you need to make serious later-in-life decisions.

I just read the book, “How to Retire with Enough Money; and How to Know What is Enough” by Theresa Ghilarducci. In her book, she gives an exact formula to determine how much you will need to retire based on your current income and your current lifestyle.

How to Calculate How Much You Will Need to Retire

Theresa’s magic formula to calculate how much you will need to retire is to take your current salary, multiply it by 70% and then multiply that by 30. Thirty being the number of years you will theoretically be alive for once you retire. So if you plan on retiring early, you will need to use a higher number of years for your calculation. The theory behind 70% is that during retirement you will no longer need to save a portion of your salary, so you do not need to make as much money.

The other caveat is that if you are early in your career, the salary used in the calculation should not be your current salary, but the max salary you think you can earn in your field. For instance, if I was an administrative assistant making $30K, I may assume that by the time I retire, I will be making $60K, so that would be my starting point. Or if I am a young attorney, I might assume that by the time I retire I will be making $150k. Use whatever number is reasonable for your field.

To test her theory, you can take the number you calculated earlier and see how it equates to a monthly salary, and compare it to your current monthly salary. Let’s say I make $65K per year and that is the max I think I will earn. Based on her formula, I will need to have saved $1.35 million. Now divide that number by 30, then by 12 to get your monthly income, giving you $3,791 per month. That is the amount I would make every month, which is 70% of my current pre-tax income.

So Where Exactly is the Retirement Money coming From?

1 – Social Security

Your retirement money will come from Social Security (hopefully), the money you have saved in your 401k and other retirement accounts. The reason I said hopefully is because the way our current political climate is structured, who knows if there will be any money left in Social Security when you retire. In my grad school economics class 12 years ago, my professor warned us over and over that the system will run out of money by 2045 unless changes were made. Tick tock.

But let’s say that Social Security is fine. Currently, if you are working full time and paying payroll taxes, you and your employer are contributing 12.4% of your pay into the system. 6.2% is deducted from your paycheck and your employer pays the other 6.2%. Without you doing anything, money is being saved for your retirement.

You can actually see how much your expected Social Security benefits will be at retirement right now by logging on to their website, and creating an online account. They also send annual statements to you in the mail. The system calculates your expected benefits by using what you have already contributed and estimating what it thinks you will contribute by the time you retire. The number listed is your expected monthly income so you can use that number, multiply it by 12, then by 30 to see your lump sum at retirement

For most Americans, this will replace about 40% of your current income. So the other 30% will need to come from your savings and 401k.

If you are currently NOT saving, then you have to understand now that you will be living on 40% of your current income! Pretty scary thought.

2 – 401k/Savings

To determine how much you will have in your 401k at retirement, you can use an online 401k calculator or my investment calculator in the budget tools section. The calculator will project an amount based on what you currently have saved and how much you invest per cycle. You should also use similar calculators to estimate the future value of your IRA, savings accounts, and other investments.

If I am making $65K, and using the amount from the estimator and my 401K calculator, my total does not add up to at least $1.35 million, I know that I have to make a change. I may not be able to increase the amount I will have in social security unless I decide to retire late or get an additional job, but I know that I can increase my savings by increasing how much I contribute to my 401k, fully funding my IRA every year, and making investing a priority.

While it is never too late to start saving for retirement, the younger you start the better! Especially if you are consistent.

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About Kamilah

My name is Kamilah and I am a native New Yorker of Caribbean descent who is passionate about helping you learn how to invest and build your net worth by sharing easy-to-follow YouTube tutorials that will help you take control of your money and set you up for financial success. But this wasn’t always my story.

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