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Enough To Retire – A Simple Calculation Delivers a Yes or No Answer

5 Steps To Determine If You Will Have Enough To Retire


Retired couple taking a walk
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Are you saving enough to retire? Walk through the five steps below and in five minutes you can come up with a simple yes or no answer. 

Five Steps To Determine If You Will Have Enough To Retire

  1. What are your total annual contributions to retirement savings?
  2. Multiply that number by the number of years left until retirement.
  3. Add your current retirement savings to that number.
  4. Divide by the number of years you expect to live in retirement.
  5. Add that to other guaranteed sources of income.

Here's an example of how to use these five steps.

The facts:

  • Couple, age 55.
  • Each contribute the maximum amount to their IRA account every year, for a total of $12,000 of IRA contributions each year.
  • Have $150,000 saved already.
  • They would like to retire at their full retirement age as defined by Social Security, which in their case would be age 66 and 2 months, but we’ll call it age 67.
  • Based on output from a few life expectancy calculators, they expect at least one of them to live to age 94 so they expect to have 27 years in retirement.
  • He will have $2,200 per month ($26,400 per year) in Social Security benefits, and she will collect half of this amount ($13,200 per year).

Using their data, this is how the enough to retire calculation works:

  1. $12,000 (This is their total annual contributions to retirement savings.)
  2. $12,000 x 12 = $144,000 (Their total annual retirement savings multiplied by years left until retirement.)
  3. $144,000 + $150,000 = $294,000 (the total expected future retirement savings added to existing savings.)
  4. $294,000 / 27 = $10,888 (Total future and existing savings divided by number of years you expect to live in retirement.)
  5. $10,888 + $26,400 + $13,200 = $50,488 (Annual expected retirement income from savings added to other sources of guaranteed income; in their case Social Security.)

In this case the $50,488 represents their annual expected retirement income. 

*This enough to retire calculation taken from Michael J. Zwecher's book entitled Retirement Portfolios, Theory, Construction and Management.

Objections To This Type of Retirement Calculation

Some will object that this simple enough-to-retire calculation does not take into account the growth rate on investments, or inflation. For the sake of simplicity, assume a growth rate on safe assets is 3%, and inflation is 3%. Those two variables would then cancel each other out.

It is impossible to accurately predict all of the variables that will affect one's retirement plan over a thirty year time horizon. More detailed planning is useful, but this simple enough-to-retire calculation above offers a great starting place. 

What if You Don't Have Enough?

Some people don't want to do any calculating because they are afraid of the answer. Don't do this! It is far less stressful to do the math, and then figure out an action plan than it is to get to retirement and come up short. If you run through the calculations above and think you don't have enough check out 5 Things You Can Do When You Don't Have Enough to Retire.

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