Dear Savvy Senior: Can you help me calculate about how much my wife and I need to save for retirement? We are both in our late-50s and want to see where we stand.
— Looking Ahead
Dear Looking: Calculating an approximate number of how much you’ll need to save for a comfortable retirement is actually pretty easy and doesn’t take long to do. It’s a simple, three-step process that includes estimating your future living expenses, tallying up your retirement income and calculating the difference. There are even a host of online calculators that can help you with this.
The first step is the most difficult — estimating your living expenses when you retire. If you want a quick ballpark estimate, figure about 75-85 percent of your current gross income. That’s what most people find they need to maintain their lifestyle in retirement.
If you want a more precise estimate, track your current living expenses on a worksheet and deduct any costs you expect to go away or decline when you retire, and add whatever new ones you anticipate.
Costs you can scratch off your list include work-related expenses such as commuting or lunches out, as well as the amount you are socking away for retirement. You may be able to deduct your mortgage if you expect to have it paid off by retirement, and your kid’s college expenses. Your income taxes should be less.
On the other hand, some costs will probably go up when you retire, such as health care, and depending on your interests, you may spend a lot more on travel, golf or other hobbies. If you’re going to be retired for 20 or 30 years, you need to factor in the occasional big budget items such as a new roof, furnace or car.
Step two is to calculate your retirement income. If you and/or your wife contribute to Social Security, go to ssa.gov/myaccount to get your personalized statement that estimates what your retirement benefits will be at age 62, full retirement age and when you turn 70.
In addition to Social Security, if you or your wife has a traditional pension plan from an employer, find out from the plan administrator how much you are likely to get when you retire. Figure in any other income from other sources you expect to have, such as rental properties, part-time work, etc.
Calculate the Difference
The final step is to do the calculations. Subtract your annual living expenses from your annual retirement income. If your income alone can cover your bills, you’re all set. If not, you’ll need to tap your savings, including your 401(k) plans, IRAs or other investments to make up the difference.
So, let’s say you need about $55,000 a year to meet your living expenses and pay taxes, and you and your wife expect to receive $30,000 a year from Social Security and other income. That leaves a $25,000 shortfall that you need to pull from your nest egg each year ($55,000 – $30,000 = $25,000).
Then, depending on what age you want to retire, you need to multiply your shortfall by at least 25 if you want to retire at 60, 20 to retire at 65, and 17 to retire at 70 — or in this case that would equate to $625,000, $500,000 and $425,000, respectively.
Why 25, 20 and 17? Because that would allow you to pull 4 percent a year from your savings, which is a safe withdrawal strategy that in most cases will let your money last as long as you do.
If you need help, there is a bevy of free online retirement calculators to help you, such as the ones offered by T. Rowe Price (troweprice.com/retirement) or Financial Mentor (financialmentor.com/calculator).
Send your senior questions to Savvy Senior, P.O. Box 5443, Norman, OK 73070, or see savvysenior.org. Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior.”