How Much Income Will You Need During Retirement?

New Pittsburgh Courier; City Edition › September 02, 2009

Linked as:

Summary

Using today's dollars, how much income do you think you'll need each month to cover your monthly household expenses? Let's say that you need $3,000 to pay for your monthly household expenses. I'm sure that you want to have money left over after you pay the bills. How much extra do you need to do fun stuff: take annual vacations, spend on impulse etc? Let's say you'd like an extra $500 remaining after the bills are paid. Using our example, you need a total of $3,500 per month.

Multiply your monthly retirement income deficit by 12-months to calculate the annual income needed initially during retirement. $2,600 (RID) times 12-months equal $31,200. Divide the annual income by .80 ($31,200 divided .80 = $39,000). This figure represents the gross amount you'll need annually to net $31,000 per year or $2,600 per month after taxes. Divide the gross amount ($39,000) you'll need initially during retirement by .04 (moderate risk tolerance) to determine the size of the nest egg we'll need to accumulate. In our example, well need a nest egg of $975,000 to generate a monthly income of $2,600 after taxes. My calculation ensures that you don't outlive your savings and that you leave a legacy to your heirs.

Chances are, you've already established a retirement savings. This money will continue to grow over time. Depending on how good of a job you've done investing your money and that you avoid early withdrawals from your retirement savings, you may be will on your way to amass $975,000. Assuming the current value of your retirement savings is $50,000, you have 20years before you retire, and your average rate of return is 10-percent. Your current $50,000 savings will grow to $336,375 over 20-years. As a result, we'll need to save an additional $638,625 between now and the day we retire to meet our goal of $975,000.