Money Matters: Knowing What You Need to Retire

Cary, NC — Uncertainty over the future of Social Security, longer life expectancy and inflation all factor into how much you’ll need to save for a comfortable retirement.

Estimating Living Costs

Many financial experts advise that you’ll need between 60% and 100% of your final working year’s salary when you retire. Given the rising cost of living, this means you need to plan on an annual retirement income that will likely be substantially higher than what you earn now.

Figuring out exactly how much to plan for in retirement and how much you need to save today first requires making estimates of expenses. You may have higher expenses in some things, such as medical care, but lower expenses in others. You can estimate your “personal inflation rate” by looking at your expected living costs in retirement.

Income During Retirement

Retirement income may be made up of pension benefits, Social Security benefits, personal savings and investments, and income from part-time work. On average, Social Security and pensions only provide a little over half of what you’ll need. The rest you’ll have to provide yourself. By investing now with a long-term focus, you can greatly improve your chances of filling this gap. The worksheet in the accompanying article can help you estimate what your savings and investing will be. Your financial advisor can help you refine this estimate and assist you in setting up a retirement fund to provide the income you’ll need.

Gaining Control of Your Financial Future

Picturing yourself as a retiree may be hard if not impossible. But if you could envision those future years, you’d probably see a life full of activity and decades of health, happiness, and prosperity. No rocking chairs and lap shawls need apply.

The reality, however, is probably somewhere in between. The problem with the picture is that the pleasure and comfort of your later years depend, to an ever-increasing degree, on the actions you take today.

So many changing facets of the American workplace have made it more important than ever to take control of your financial future. By investing now with a long-term focus, you can greatly improve your chances of having a fulfilling retirement.

Americans used to count on a pension plus Social Security to get them through those “golden years.” These days, people change jobs more often, rely on dual incomes, and manage their own retirement funds through defined contribution plans. By most estimates, you’ll need between 60% and 100% of your final working years’ income to maintain your lifestyle after retiring.

Saving: the Key Component

The accompanying pie chart shows the importance of saving now toward a retirement fund. Not only are Social Security benefits less significant, but also the sums are diminishing and the age at which you can begin to receive benefits is higher. You can contact Social Security at 1-800-772-1213 to learn what you can expect in benefits and when to expect them. Benefits are calculated on your earnings, with certain variable factors.

Alas, the responsibility for the bulk of your nest egg rests with you. Social Security represents approximately 33% of the aggregate income of Americans aged 65 and older, according to the Social Security Administration.

Also, as you begin thinking about how much you’ll need for a comfortable retirement, you may be startled to learn the impact of inflation. At an average inflation rate of 3%, your cost of living would double in 24 years. Your annual income will need to increase each year even during retirement in order to keep up with the gradual rise in the prices of everyday goods.

You’ll also have to consider the likelihood of increased medical costs and health insurance as you grow older. The median nursing home cost for a private room, for instance, now runs more than $100,000 a year and could rise to over $140,000 per year by 2030, assuming an annual inflation rate of 3%.1

Meeting Your Own Goals

Now that you have an idea how much you’ll need to finance your retirement years, of which there can easily be 25 or more, you may better understand the urgency to build your assets.

How Much Do You Need to Retire in Style?

Most of us will need an estimated 60% to 100% of our annual preretirement income to live on each year after we retire. Find out how close you are to meeting this goal by completing the exercise below.

1. Estimate your last working year’s salary. Multiply your current salary by the inflation factor from the table below, based on the number of years you have until retirement. This represents the future value of your salary, assuming 3% annual inflation. 

Example: If you are currently making $40,000 and have 20 years until retirement, your formula is $40,000 x 1.81 = $72,400

2. Determine what percentage of your current income you expect to need after retirement. If 100% seems high, consider that while you may be able to stop paying some expenses, like mortgage payments, other expenses will likely increase, such as health and travel expenses. Multiply that percentage by the amount in #1. 

Example: $72,400 x .80 = $57,920

3. Estimate your future Social Security and retirement benefits. The best source for Social Security benefit projections is the Retirement Estimator at (If you cannot readily access the official calculator, you can also get a very rough estimate of your benefit from Table 2 below.) 

If you are using the calculator, multiply the monthly amount listed next to “at full retirement age” by 12, then multiply that figure by the inflation factor from Table 1 below. 

Example: If the calculator shows an estimated monthly benefit of $1,153, your formula is $1,153 x 12 x 1.81 = $25,043

4. If you are using Table 2, take the number corresponding to your annual salary and years to retirement. 

Example: If you currently earn $40,000 and have 20 years to retirement, your estimated benefit would be $25,000

5. Subtract your Social Security benefits and other retirement benefits from the annual amount calculated in #1. This will give you an estimate of how much of your own savings you will have to use each year in retirement. 

Example: $57,920 – $25,000 = $32,920

6. Estimate the total amount that you will have to put aside in retirement accounts, such as 401(k) plans, individual retirement accounts (IRAs), and personal savings accounts. To determine how much you will need to save, multiply 19.3 by the annual amount you calculated in #3. This multiplier represents how much savings you would need to last 28 years at 3% inflation and earning a 6% annual return. A healthy, 65-year-old male has a 10% chance of living longer than 28 years. 

Example: $32,920 x 19.3 = $635,356

7. Enter the amount of your current savings and investments and multiply it by the growth factor from the accompanying table. This is what your savings would be worth by the time you reach retirement, assuming an 8% return compounded annually. 

Example: $30,000 x 4.66 = $139,800

8. If line 5 is larger than line 4, congratulations! You are on your way to meeting your retirement goal. Keep saving! If line 4 is larger than line 5, subtract line 5 from line 4. Enter that amount here. This is the additional amount you’ll need. 

Example: $635,356 – $139,800 = $495,556

9. Divide #6 by the multiplier in the table below for the number of years until your retirement. The multiplier represents how large your savings will grow based on your annual contribution, assuming an 8% annual return. The result is the approximate amount you may want to set aside each year. 

Example: $495,556 ÷ 49.42 = $10,027

Table 1 — Factors

Years Inflation Growth Multiplier
5 1.16 1.47 6.34
10 1.34 2.16 15.65
15 1.56 3.17 29.32
20 1.81 4.66 49.42
25 2.09 6.85 78.95
30 2.43 10.06 122.35
35 2.81 14.79 186.10
40 3.26 21.72 279.78


Table 2 — Social Security Income

Years to Retirement
Current Salary 40 35 30 25 20 15 10 5
$20,000 29,500 27,000 25,000 22,500 20,500 19,000 17,500 16,000
30,000 32,500 30,000 27,500 25,000 22,500 21,000 19,000 17,500
40,000 35,500 32,500 30,000 27,000 25,000 23,000 21,000 19,000
50,000 38,500 35,500 32,500 29,500 27,000 25,000 22,500 21,000
60,000 41,500 38,000 35,000 32,000 29,000 26,500 24,500 22,500
70,000 44,500 41,000 37,500 34,000 31,000 28,500 26,000 24,000
80,000 47,500 43,500 40,000 36,500 33,500 30,500 28,000 25,500
90,000 50,500 46,500 42,500 39,000 35,500 32,500 29,500 27,500
97,500 + 53,000 48,500 44,500 40,500 37,000 34,000 31,000 28,500
*Assumes 3% annual inflation and a 5% annual return.

Pensions, Social Security, and Other Allies

Traditional pensions (private and government) are estimated to supply about 21% of the aggregate income of today’s retirees, while Social Security is estimated to supply 33%, although nearly two thirds of retirees rely on Social Security for 50% or more of their income, according to the Social Security Administration. Still, you’ll probably fall far short of your goal. A radically reduced standard of living for a quarter century or more is hardly the stuff “golden age” dreams are made of.

Fortunately, you have some allies. First is the power of compounding, which takes advantage of time. Tax deferral is another ally. Using investment vehicles such as 401(k) plans or IRAs, you can put off paying taxes on your earnings until you are retired and potentially in a lower tax bracket. Meanwhile, your contributions may be pretax or tax deductible, helping reduce current tax bills.

For example, an investment of $10,000 would grow to more than $100,000 after 30 years at an annual return of 8% if all the returns were reinvested and the account grew tax deferred. As with all hypotheticals, this example does not represent the performance of any specific investment, and the earnings would be subject to taxation upon withdrawal at then-current rates and subject to penalties for early withdrawal.

The more time you have until retirement, the more fortunate you may be. Delaying just months, never mind years, can significantly reduce your results. Consider this example: Jane begins investing $100 a month in her employer-sponsored 401(k) plan when she’s 25. Mark invests the same amount — beginning when he’s 35. Assuming a 7.5% annual rate of return compounded monthly, when Mark retires at 65, he’ll have $135,587. Jane will have $304,272.

While this is only hypothetical and there are no guarantees any investment will provide the same results, you can see the remarkable difference starting early can potentially make.

Benefits of Starting Early

By starting early, investing systematically, and benefiting from the potential of compounding and tax deferral, you may pack a lot more punch into your portfolio.

Another advantage of today’s retirement planning options is that you can control how your money is invested.

Investment plans need to be customized because different people have different degrees of risk they will accept as well as varying time frames they intend to hold their investments. Keep in mind, all investments involve risk, including the possible loss of principal. A tailor-made portfolio can be diversified to take these factors into account. It’s a wise idea to consult a professional financial advisor for complete information.

Story courtesy of Briant Sikorski, a Wealth Advisor at Stratos Wealth Partners. Featured image by Monika Designs.

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