How to calculate retirement $

I am a little confused on how to calculate TOTAL $ needed for retirement. How do you include pensions and SS (and yes, I believe we have nothing to fear, but fear itself) into the figure?

I have read a lot about having 20x your annual living expenses including taxes as a reasonable goal to have at the beginning of retirement. Let's say that is $100K/year, so I need $2M. However, if I count pensions and SS are $75K/year x20=$1.5M, right there. So I need $500K in investments over and above the pensions and SS or do I need $2M in investments alone. If pensions and SS are for life ,shouldn't they be counted differently. If so, what is their multiple?

Chip

Reply to
chip
Loading thread data ...

The order of the calculation is something like this; Go to

formatting link
and calculate your expected benefit.Find your company benefit manual, and do the same for pension.Inflate your current salary to your retirement year, and subtract the SS and pension. This would be the amount of income you need to replace.A 100K/yr earner retiring now at 62 will get about $1440/mo or just over 17K/yr. Pension may be a small adder or completely provide what you need.Say you calculate these two add to 30%. You need then to replace 70% of your income and that would take 17.5X you final income at retirement. (not sure where 20X is from, it takes 25X to replace at 100%). I created a spreadsheet for this calculation, you can adjust the numbers, or reload the sheet to clear the data.
formatting link
JOE

Reply to
joetaxpayer

If you only need an additional $25K per year, you only need to save for this. $500,000 will last about 20 years, even adjusted for nominal inflation. At retirement year 20 this expense will have grown to $45,000.

JoeTaxpayer's example shows the power of compound interest. He only has $521,000 at age 52, but $1,238,000 at age 62.

Spending down is the opposite of compound interest. Every year your principle goes down and your expenses go up.

As usual you can only say: if I do this what happens given these rules. Nobody can predict the future.

I always try to err on saving too much.

Congratulations for doing retirement planning and good luck in retirement.

Reply to
speednxs

I believe the 20x is based on a 5% withdrawal rate from your investments to cover living expenses (20 * .05 = 1). That come from an analysis like this:

formatting link
So as pointed out above, if 30% of your living expenses come from elsewhere, then your needed investment is 14x (14 * 0.05 = .7.)

Frank

Reply to
FranksPlace2

There are a bizillion such calculators on investor web sites these days. It sort of depends on your income. If you've been earning around median wage ($46,000), social security will replaces about 40%. If you make about twice that, then social security replaces about

25%. When you take in account not having to pay social security tax and saving anymore, The necessary replacement income is 37% to 52% between those two ranges. And the savings to generate such is 7 to 12 times your income. Less if you have any other pension.
Reply to
rick++

First step would be to know how much income you will need in retirement. If you make 100k now, various web sites will suggest to replace 80-110% of this in retirement. The second issue is "income adjusted for inflation". For this the rule of 72 helps (divide 72 by inflation percentage, that is number of years it takes to make inflation double).

Examples: need 80k (in todays dollars) for retirement in 36 years. inflation expected to be 4%

72/4% years (inflation will double income needed every 18 years) In 36 years you will need 80k*2*2 (doubled twice because of inflation)=$320k in yearly income when retiring in 36 years.

find out the SS benefit (17k listed in another post) find out the pension benefit (58k estimate)

320k-17k-58k$5k

Creating an investment portfolio to generate the 245k needed each year is the next step. I have a spreadsheet I've used to calculate this (my calculations for myself suggest I need $250k of income in first year of retirement). According to my calculations I need 5.7 million to retire on at age 68 to last for 30 years. This assumes increasing withdraw by

4% each year (for inflation) and a 6% return on assetts in retirement.
Reply to
jIM

I used retirement age goal of 62. And found these replace rates at each income level;

Income Ann SS % replaced

10,000 4452 0.445 15,000 5820 0.388 20,000 6612 0.331 25,000 7404 0.296 30,000 8208 0.274 35,000 9000 0.257 40,000 9804 0.245 45,000 10584 0.235 50,000 11388 0.228 55,000 12180 0.221 60,000 12972 0.216 65,000 13776 0.212 70,000 14568 0.208 75,000 15108 0.201 80,000 15480 0.194 85,000 15852 0.186 90,000 16236 0.180 95,000 16596 0.175 100,000 16956 0.170

I find it a sad commentary that someone making 20K needs to replace .67% of his income with savings, with 16.7X if we stick with this goal, but a $40K earning who has deposited twice into the system what the 20K earner has, will only see .245% replaced and will need nearly 19X final income. Given the tendancy to upward mobility through promotions, schooling, etc, this reduced replacement provided by SS is something to follow as one targets their savings needs. JOE

Reply to
joetaxpayer

Why don't you think SS and the Pension will adjust for inflation?

Elizabeth Richardson

Reply to
Elizabeth Richardson

Your numbers are way off. By law the benefit formula is

90% x poverty number + 32% x median income + 15% x double-median income $680 $3420 $4025 (2007 numbers) The numbers for people retiring in 2007 were published yesterday at.
formatting link
someone who has averaged median income for 35 years themonthly pension for 2007 is $1706 which 41% of median income ($4100)Realistic you have to subtract the $117 medicare B&D premiumswhich brings this down to 38% replacement. Medicare premiumsare expected to rise much faster than income in the foreseable future,perhaps bring down the replacement to around 30% in 20 years. The "average income for 35 years" includes median income inflation weighting. Your early years could be blow median, later years above, etc.

Each year SS mails you an estimate. You can double-check their calculation with a spreadsheet on their website. This spreadsheet has the income deflator factors built in. You can play with what happens if one stops paying 5 years before retirement age, 10 years, etc.

Theres less incentive to work when you've reached the median average income. Your SS pensions only increases one sixth as fast as at low income levels.

Reply to
rick++

Reply to
joetaxpayer

assumptions have to be made... and maybe these are "bad".

My logic was:

SS: the benefit is known "now"- the SS statement I get now suggests my benefit will be $D at age 68, $D if I get disabled. This is what I get in 40 years based on what I've contributed now and is a known # $D.

Pension- similar issue- you know your "expected" benefit. The probability the increases will keep up with inflation is low- based on my reading of the subject. I do not have a pension (my old employer sent me a check which I rolled into an IRA, then converted into my Roth). This information was an educated guess.

My logic is going with what is known trying to minimize assumptions and build a "worse case" situation. If the SS benefit or Pension benefit increase with inflation, it makes the above easier to achieve.

Reply to
jIM

Why is that a sad commentary? Part of the basic point of social security is to prevent poverty by transfering wealth from the more well off to the less well off.

Reply to
Greg Hennessy

rick pointed out my numbers were probably wrong, but, if right, I don't think a $40K earner is in a position to be subsidizing anyone else. He's paying in the same fraction off his income as the 10-20K person, and should expect the same % replacement. (no, I haven't decides where the 'knee' of the curve should be.) JOE

Reply to
joetaxpayer

Trying to decide what he "should" expect is fraught with risks. A person making 40K a year is making about twice the poverty level, so in that sense he or she is able to help subsidize the less well off.

If you want to design a social security where only the very wealthy subsidize the poor you run into the risk of not having enough very wealthy.

Reply to
Greg Hennessy

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.