How Much Do I Need to Retire?

“The art is not in making money, but in keeping it.” – Proverb

How much do I need to retire? Should I increase the riskiness of my portfolio to make sure that I have enough money to retire? How much should I be saving as a percentage of my income to have a big enough investment portfolio?

These are many of the questions we all have when we are trying to figure out how to save for our later years. Of course there is no correct way to answer those questions without knowing your risk profile or time horizon.

Here are some further questions to ask yourself: Do you plan on having your mortgage paid off by the time you retire? How many years do you have to save? Have you thought about what your living expenses will be when you retire and how inflation will come into the equation for the 30-40 years you plan on living after work?

You need to know what your goals are for retirement. You won’t be saving anymore so you have to figure out a rough estimate of your living expenses. Do you plan on travelling year round? Downsizing your living arrangements? Living a simple life without many unexpected costs?

By going through this mental checklist of goals you can start to determine how much you should be saving. If you want to live it up in a place on the beach and never have to worry about what you spend your money on then you’re going to have to sacrifice today to live that dream and save more now. If you think you can live a reasonably quiet life and visit family and friends on your downtime then you can probably plan on having a smaller nest egg.

Now, no one can predict exactly how their future will play out as far as jobs and salaries go so you can only plan ahead so far. But that doesn’t mean that you shouldn’t try. Assume that your retirement contributions will increase by the rate of inflation each year (a 2-3% standard of living raise). Then estimate the amount you will be saving every year. Use a variety of return assumptions (I would say 4 – 8% so be safe) and insert these numbers into a retirement calculator.

They’re easy to find online. Here’s a good one from Money Magazine. Or you can build a simple spreadsheet on Excel if you know what you are doing with numbers and formulas (I have an offer at the bottom of the page if you would like a simple spreadsheet that I built). Map out every five years for where you should be based on your assumptions of saving amounts and returns. Here’s an example:

Let’s say you start saving for retirement at age 30. You want to know how things will shake out for retirement at age 65 if you save $500, $750 or $1,000 a month for the rest of your career (increasing by 2% a year for raises and increased contributions). You also want to know how a market return of 4%, 6% or 8% a year will look based on those saving amounts. Listed below are the ending values at age 65 based on those assumptions:

Monthly Savings 4% Return 6% Return 8% Return
$500 $607,214 $904,105 $1,380,829
$750 $910,821 $1,356,158 $2,071,244
$1,000 $1,214,428 $1,808,210 $2,761,658

As you can see, the numbers vary greatly depending on the amount you save and what returns you earn on your investments. Because of the wonders of compound interest, you can see that doubling your return actually more than doubles your ending balance. This speaks more to the fact that you should start saving early than the goal of getting higher market returns.

My advice would be to be conservative and take the upper range of the savings amount and the lower range of the return amount. You can control how much you save but not how much the market’s return will be.

These numbers are useful to plan for how much you will have and how much you will be able to spend (a good rule of thumb is to assume you will withdraw 4-5% of your money per year for spending in retirement so you don’t run out), but you also need to check your progress along the way. So let’s use the 6% return number with savings of $750/month to see how you can track your goals along the way. Here are the balances that you would have saved along the way (again, starting at age 30):

Age 35 – $55,843
Age 40 – $136,687
Age 45 – $250,589
Age 50 – $410,503
Age 55 – $632,327
Age 60 – $937,813

Now you can use these numbers to track your goals as you go through your career as you save. If you set your assumptions at 6% returns on $750 a month of savings (increased 2% a year) then you can see where you theoretically would be based on those assumptions. But the markets don’t always cooperate and give us steady return numbers each year.

Let’s say the returns you earn on your investments are lower than anticipated. You may have to increase the amount you save each month to stay on track. Now assume you are over the amount by each milestone. Then you can keep things the same (and maybe retire early) or possibly reduce the amount you are saving.

You can also change your assumptions based on your situation each time you check your goals if things have changed drastically in your life or if you have different goals for your retirement years.

Don’t get discouraged if you can’t save the amounts yet in my examples. This is purely to show the possibilities. Everyone’s situation will be different. You just have to start saving something. Then slowly work your way up to higher amounts as you can.

By having goals and checkpoints to benchmark your saving and investment returns along the way you can get a better sense of how you are really doing to achieve your retirement goals.

And you will have a better gauge of how close you are to that dream retirement. It’s hard for most people to look out 30 to 40 years into the future to plan out their retirement. By breaking it up and looking at your goals every five years and re-evaluating your situation you can make it a more manageable part of your life.

So from now on every year when you try to answer the question, “How much do I need to retire?,” you can take a look at your progress and make sure you are on the right path to financial freedom.




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  1. Rob commented on Feb 21

    Have you written about what effect down years have on average returns? For example, when your portfolio declines by 50%, you have to double it just to get back to even. I’d love to see your analysis around how this affects “average” returns.

    • John Richards commented on Mar 03

      I am not sure if my experience would be helpful; I can offer only the anecdotal experience of 20 years of investing… my arithmetic mean is a shade over 10% annually, geometric a shade under 10% annually. That includes 2000-2002, and 2008, though I admit to some significant tweaks to my portfolio in 2007/8/9. Generally I was very aggressive in my portfolio asset allocation. Most of that time I was mostly winging it, and even now won’t claim to really have a good system in place, so I’m not speaking as an authority – just giving you my 2 cents…. The point being that equity markets tend to return about 10% annually over the long run, including the bad years. Even a 60/40 portfolio should generate about 8% on average in the long run, with the usual caveats about investment horizons and volatility. FWIW.