One of the most common questions people ask as they get closer to retirement age is, “how much money do I need to retire?” And while we would like to be able to give you an answer right away, the truth is that it depends on many factors and is different for everyone. Some of the things we will have to take into account are current income and expenses, expected future income and expenses, life expectancy, and inflation.
For the example in this article we will be using a pre-retirement monthly average expense of $6,000, or $72,000 per year. If your planned retirement age is 15 or more years away, then reduce your current expenses by 20% when calculating future expenses. If you are planning to retire within the next 5 years you should assume your expenses in retirement are the same as your current expenses. For this example, we will use someone who is planning to retire soon and keep their expected expenses at $6,000 per month.
Life Expectancy and Retirement Planning
When planning for retirement, we use 90 years of age for our life expectancy. However, if you have longevity in your family or you want to be conservative, you can use age 95 for your life expectancy. So for our example, we will assume 25 years of retirement to plan for, with an expected retirement age of 65 and a life expectancy of 90. And while some people may think that 95 or even 90 is too high, we believe it is better to be prepared for a long life than not. The medical field is always improving, so people are expected to live longer and longer.
Inflation and Retirement Planning
If we are assuming 25 years of retirement, that means we will also have to plan for future inflation. Over the previous 25 years, the average inflation rate was 2.12% per year. But we will be using a conservative inflation rate of 3% per year for the purposes of this example — after all, it is better to be safe than sorry. This 3% inflation rate will continue throughout our 25 year retirement period. As you can see from the chart to the right, yearly living expenses of $72,000 more than double over a 25 year retirement with 3% inflation. And the total retirement expenses for that period exceed $2.5 million dollars!
| Years Retired | Yearly Expense |
| 1 | $72,000 |
| 5 | $81,037 |
| 10 | $93,944 |
| 15 | $108,906 |
| 20 | $126,252 |
| 25 | $146,361 |
| 25 Year Total Retirement Expenses: $2,625,067 | |
Can You Retire Today?
The chart below gives a rough estimate of how much money you will need to retire today based on your life expectancy and desired annual income.
For our example, we will be looking at the bottom row of the $75,000 Income column. We assumed a retirement age of 65 with a life expectancy of 90, which puts us in the 25 Years in Retirement row. Then, since the example we used included a yearly income of $72,000, we’ll use the $75,000 column for reference. Doing so shows us that we would need at least $1,357,204 of retirement investments to continue living at the same financial level for the next 25 years.
| Years in Retirement | $30,000 Income | $40,000 Income | $50,000 Income | $75,000 Income | $100,000 Income |
| 5 Years | $141,746 | $188,995 | $236,244 | $354,366 | $472,288 |
| 10 Years | $264,538 | $352,717 | $440,897 | $661,345 | $881,793 |
| 15 Years | $370,910 | $494,546 | $618,183 | $927,274 | $1,236,365 |
| 20 Years | $463,057 | $617,409 | $771,761 | $1,157,642 | $1,543,522 |
| 25 Years | $542,882 | $723,842 | $904,803 | $1,357,204 | $1,809,606 |
Money Needed to Retire
For most of us, retirement does not necessarily mean the end of an income. Pensions and Social Security benefits will reduce the amount which you need to save for retirement. To get a general idea of how much you will need, use the chart above and subtract your expected retirement income from it. Whatever is left is a rough estimate of how much money you need to retire. So if your annual expense need in retirement is $75,000 per year, but you will receive annual Social Security benefits of $15,000, then the $50,000 Income column would provide an estimate of what you need to save.
However, the reality is that retirement planning is much more complicated than that. You should also be considering the rate of return on money (investments, cash, etc.) and taxes along with the items we have covered.
And, there is always market volatility which can have a major effect on your retirement planning. To stress test the outcome of market volatility on your retirement plan, we use Monte Carlo simulations with varying investment returns instead of a static rate. These simulations run through thousands of future possibilities and give us an insight into how different market conditions may affect your retirement plan. We then use this probability to help you make informed decisions about your future.
Conclusion
When it comes to your retirement plan, and specifically how much money you will need, there are many factors to consider. These include income, expenses, life expectancy, inflation, and even market volatility. However, an experienced wealth management advisor can help you work through these complexities and create a plan for you.
Trinity Wealth Management
It is never too early to begin thinking about your retirement. If you are concerned about your retirement plan contact Trinity Wealth Management today. We will provide you with a free consultation to go over the current state of your finances and how we can help. Do not wait — start planning for your future today!
The commentary on this website reflects the personal opinions, viewpoints and analyses of the Trinity Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Trinity Wealth Management, LLC or performance returns of any Trinity Wealth Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Trinity Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
