10 Questions to Help Accurately Calculate Your Retirement Numbers

How much money do you need to retire? It seems like a simple question, but for most of us, it’s a trick question because there is no quick answer. There are many, many variables in play when considering retirement planning and retirement goals. 

Preparing for the future and planning for retirement is on many of our minds. Yet, according to a 2020 survey, fewer than 44% of Americans reported that they have actually thought about how much money they will need to budget for in retirement. Even more, among the top 3 major fears of Americans include: 

1.     Healthcare costs (71%)
2.     Inflation (67%) 
3.     Possible market downturns (66%)

So, how much do we all really need to save? How can we all avoid underfunding our golden years? Let’s walk through some of the topics you should consider when getting started with your retirement planning and some of the calculations you’ll need to make to get an estimate.

Question 1: Am I Saving Enough? How Much Money Do I Need for Retirement?

What amount would it take for you to feel confident about retiring? Because there are so many variables (such as what your expenses will be) and unknowns (such as how long you’ll live), many experts find a common baseline by using the  25x rule. Simply put, this means that to stop earning new income, you will want to have saved 25 times the amount you expect to need every year in retirement. Here’s how to figure that out.

The retirement calculation:

1. Start with your current monthly budget (if you don’t have one, read this!).
2. Multiply by 12 to get your rough yearly budget (if you plan or hope to keep spending at the same pace).
3. Multiply that yearly budget by 25.

The example:

1. You currently spend about $4,000 per month.
2. $4,000 x 12 = $48,000
3. $48,000 x 25 = $1.2 million

Now, there are some (big) caveats. Income from Social Security benefits, a pension, a part-time job or rental property might reduce the amount of savings you need when you retire. Healthcare costs, on the other hand, could increase the amount you need. Also, this assumes your investment portfolio will grow by 6% annually, which is often used as an expected return by expert investors. This also doesn’t factor in how much you can withdraw from your investments—or the taxes on those withdrawals. Plus, do you want to travel? Will you live to be 100?

We could go on. But this is a good place to start—and the 25-year estimate will help you maintain your savings when you apply the 4% rule (more on that later).

Question 2: What Age Can I Retire?

While we can’t tell you how many gray hairs you’ll have by retirement, we can help you estimate roughly when you’ll be financially ready to pull the trigger.

The secret, of course, is saving money. You need to assess how much you’ve been able to set aside so far and what you think you can save moving forward. Here’s what to do.

The retirement calculation:

1. Start with your 25x number.
2. Subtract the savings you have today to get the savings you’ll need.
3. Estimate what your current savings may grow to by the time you reach, say, 65, by plugging that number into a compound interest calculator like this one. Assume 6% growth.
4. Subtract that amount from your 25x number, too.
5. Divide the result by the amount you think you can save each year. The answer is the number of years you’ll need to get there.

The example:

1. Say your 25x number is $900,000.
2. Assume you’ve already saved $75,000. $900,000 – $75,000 = $825,000 (your target!)
3. If you’re 35 years old, by age 65 your $75,000 will be worth $431,000.
4. $825,000 – $431,000 = $394,000
5. Say you can save $12,000 per year. $394,000 / $12,000 = 33 years

If you’re 35 now, you could retire at 68. But remember that this is just an estimate, and there are more caveats (in addition to the ones above): Inflation will eat into your savings (more to come on that), but your savings and investments may help offset that along the way. Let’s look at that next.

One essential thing to remember is that investing involves risk. Throughout the calculations in this article, we reference an average 6% return on investments. This assumed rate of return is not set in stone, and it will depend on how you invest, save and allocate your money, including the level of risk in your portfolio. The 6% return is a reasonable expectation based on the history of the S&P 500 Index, but consult a financial advisor if you want to be more precise in your calculations and remember that financial markets don’t always act as they did in the past.

Question 3: How Much Savings Will I Have When I Retire?

What will your portfolio numbers look like when you retire? Here’s how to figure it out.

The retirement calculation:

1. Think about how many years you plan to work.
2. Using an interest calculator, figure out what your current investments will be worth when you retire, assuming 6% annual growth.
3. Estimate your yearly savings.
4. Calculate how much your savings will grow over your working years (again, assuming 6% growth).
5. Add all that up and see what your savings and investments might look like when you retire.

The example:

1. Let’s say you’re 30 years old and think you’ll retire at 65.
2. Assume you have $50,000 saved. Over 35 years, that will grow to $384,000.
3. You can save $500 a month or $6,000 a year. (Of course, you may get salary increases, which could let you increase this amount.)
4. Over 35 years, that regular contribution will get you to $669,000. (For comparison, if you just saved that money without investing it, you’d only have $210,000!)
5. $384,000 + $669,000 = $1,053,000

And don’t forget all the caveats from above. We’ll take a deeper dive into some of those now.

Question 4: How Will Inflation Impact My Retirement Savings?

Don’t neglect inflation. We’re going to repeat that: Don’t neglect inflation.

Why? Say you stuffed $5,000 in cash into your mattress back in 2001. It would still look like $5,000 today, but you’d need more than $7,400 to buy the same amount of stuff today as you could with $5,000 in 2001. The reason? Yep—inflation.

While inflation can vary considerably, depending on what’s happening to money worldwide (a pandemic, for example), the historical average is generally recognized as being around 3%. Until recently, inflation rates hadn’t reached 3% since 2011. However, much has changed over the last year. At the end of 2021, the inflation rate was just over 7% — an all-time high. That said, the rise in prices affects how much current retirees have to spend; with higher prices comes a higher cost of living. And the amount of return you get on your investments impacts your retirement savings.

There’s an extra wrinkle for retirees. Inflation around the cost of healthcare—where seniors spend three times as much as adults who are working—is rising faster than that of other industries. In fact, out-of-pocket spending on healthcare grew by 4.6% according to data from 2020. And high inflation impacts healthcare costs for retirees, so it’s important to keep that in mind as you move into retirement. You may want to consider reducing costs (by moving to a smaller home, for example) or making less-conservative investments that are more likely to keep pace with inflation.

Question 5: How Much Should I Withdraw From My Savings in Retirement? What Is the 4% Rule?

When you retire, you may suddenly have the urge to splurge on eating at Michelin-starred restaurants or traveling to expensive locations. Blow through your nest egg too fast and you’ll be in trouble. The key is to maintain a steady pace of withdrawals. 

Many experts recommend annual withdrawals of 3%–5%. The general rule of thumb is 4%. This assumes that over the long term, a stock portfolio will grow at about 6%–7% per year (of course, that could be higher or lower). When you subtract 3% to account for rising prices, you end up with 3%–4%.

The retirement calculation:

1. When you retire, calculate 4% of your total retirement savings; this is what you can draw down during your first year.
2. The second year, adjust for inflation by adding 3% to your first-year figure. This is your new 4%.
3. Continue every year by adding 3% more.

The example:

1. Say your savings is $800,000. $800,000 x 0.04 = $32,000.
2. Add 3% the next year. $32,000 x 0.03 = $960; $32,000 + $960 = $32,960
3. The third year, add in 3% of $32,960 for a total of $33,948. And so on.

Question 6: What Will My Retirement Budget Look Like?

Retirement is a new era, but just like the rest of your life, it will evolve. In each phase of your later years, your concerns, goals and budgets will vary. Here’s one way to break down your retirement.

• First decade of retirement. As you adjust to your new lifestyle, you’ll likely be in good health and excited by the transition. Enjoy! Don’t overdo it on spending, but if you can build some flexibility into your budget, it’s probably OK to take a little extra. Whatever you do, draw down your retirement savings accounts as little as possible—they still have to last you a while!
• Second decade of retirement. You’ve had some fun, and now you might be settling down a bit—spending drops 23% for 75-year-olds compared to the decade before, says one study. Perhaps you’ve downsized or paid off a mortgage and your housing costs are down. However, home improvement or accessibility costs could go up, as will healthcare costs, most likely. If your investments have done well and you need some extra cash, think about taking a little more from them.
• Third decade of retirement. At this point, you may be moving into an assisted living facility or even needing long-term care. You’re likely spending less on everyday activities, but be prepared for increased healthcare costs, especially if you need assistance. As you wind down, you can increase your percentage of withdrawals further, though keep in mind how much you want to leave behind in your estate.

Question 7: How Much Social Security Will I Receive During Retirement?

No question: Social Security can give a nice financial boost to your golden years—one that you’ve earned! In fact, in 2022 social security check recipients are to  receive over a 5% boost, which is the highest in 40 years. It’s important to note that the rules are far from simple, and a few factors will determine how much you’re paid:

●    The year you were born. You can collect full retirement benefits at either age 66 or 67. If you were born in:

• 1943–1954: Age 66
• 1955–1960: Age increases gradually to 67
• 1960 or later: Age 67

●    How much you earned while working. The more you made, the more you paid in, so the more you’ll get back in retirement. How much will you get? It’s a complicated formula, so we recommend using this calculator from the government or signing into the SSA site to see your personal projected benefits.

●    The age you start receiving payments. You’re eligible to begin collecting when you hit age 62, but you’ll make more if you can wait. The benefit amount increases about 8% each year until you reach age 70, when the increases stop. 

Say your full retirement age is 66: At 62, you’ll receive only about 75% of the benefit that you would get at age 66, though you’ll get those payments for an additional four years. If you can wait until age 70, you’ll receive 132% of the benefit, but you’ll get fewer payments. 

So should you take more payments with less money or more money with fewer payments? It depends on your circumstances. Do you need the money earlier in your retirement? Do you have health concerns that might make taking it earlier a smart decision? If not, it could make sense to wait—you’ll make more over the long run if you live long enough. The math is essential.

Question 8: What Are Required Minimum Distributions?

Hopefully, over your career, you’re able to capitalize on a gift the government gives you—the incentive to put aside some money and have it grow before you pay taxes on it. These  tax-advantaged retirement savings accounts, such as 401(k)s or traditional IRAs, are great vehicles for saving.

The tax bill will come due as you take money out. And there are penalties for withdrawing early and late. You can start making withdrawals at age 59½ (before that, there’s a 10% penalty in addition to taxes). But you have to start making withdrawals at age 72 (unless you were born on or before June 30, 1949; then it’s age 70½). Fail to take these required minimum distributions (RMDs) and you’ll face a whopping 50% penalty on the amount you should have taken out. 

How much is your RMD? The IRS bases the amount on life expectancy and uses a distribution factor based on your age. Here’s how it works.

The retirement calculation:

• Start with the value of each account for the previous year.
• Find the distribution factor for your age (use this IRS worksheet).
• Divide the retirement account balance by the distribution factor, and that’s what you’ll have to withdraw that year.

The example:

• Your account has $500,000.
• If you’re 72, your distribution factor is 25.6.
• $500,000 / 25.6 = $19,531

Don’t forget that the distribution factor will be different next year!

As always, there are caveats. The rules are different for inherited savings accounts and for married couples. Roth IRAs are treated differently, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted during the pandemic, waived RMDs for 2020, to let retirees have another year for their savings to grow.

Question 9: What Will My Tax Burden Be in Retirement?

Just like you can’t ignore inflation, you also have to keep taxes in mind. Everything from 401(k) withdrawals to pensions and annuities will be taxed. Just like in your pre-retirement years, if you make enough, you’ll be bumped to a higher tax bracket.

Here are three things you can expect to be taxed on:

1. Retirement funds. The money in your 401(k) and traditional IRA gets to grow without paying taxes, but the bill comes due once you start making withdrawals, which are taxed as ordinary income. Luckily the money you’ve earned on those investments (again, assume 6% a year compounded) will help counter the taxes you owe.
2.  Social Security. The government giveth and then it taketh away. If this is your only source of income, you likely won’t be taxed. But whether you owe federal tax depends on your provisional income, which is the combination of your gross income, any tax-free interest you received (like from a municipal bond) and 50% of your Social Security benefit. If that total is less than $25,000 for singles or $32,000 for married couples filing jointly, you don’t owe anything. Between $25,000 and $32,000, you could owe up to 50%. Above that, you could owe taxes on up to 85% of your benefits. Depending on where you live, you may also owe state taxes on your Social Security benefits.
3.  Local taxes. Don’t forget about state, town and property taxes. Your local government wants its cut, too!

How can you save on taxes? Here are a few ideas:

1. Consider moving. Several states have no income tax; others specifically don’t tax distributions from tax-advantaged accounts or may offer other tax benefits to retirees.
2.  Use your Roth IRA. If you can, limit your traditional IRA withdrawals so that you stay in a lower tax bracket, and supplement with withdrawals from a Roth IRA (which is funded with after-tax dollars but allows for tax-free distributions) to get the amount you need. Both traditional and Roth IRAs have income requirements, so make sure you read the details from the IRS.
3. Give to charity. Making a donation to a qualified charity with your RMD could keep you in a lower tax bracket. Restrictions apply, so read the rules carefully.

Question 10: If I Took an Early Distribution From My 401(k), How Will That Impact My Retirement Age?

The  CARES Act allowed you to withdraw up to $100,000 from your 401(k) without the usual 10% penalty, if you were eligible. If you took advantage, there are a  couple of considerations.

1.  Taxes. Penalty fees were waived; taxes were not. But the rules allow you to spread out that tax burden evenly over three years—2020, 2021 and 2022—as if the distribution were income earned over that time. If you can pay back the amount you took out within that three-year window, something magic happens: You can claim a refund on those taxes.
2. Reinvesting. If you don’t need to spend all the money, reinvest it! No matter how far you are from retirement, it’ll help. What would that look like (assuming a 6% return and compound interest)?
3. That full $100,000 could return $182,000 after 10 years, $331,000 after 20 years and $602,000 after 30 years.
4. Only have half left? Invest! The $50,000 could turn into $91,000 after 10 years, $165,000 after 20 years and $301,000 after 30 years.

Retirement Takes Work and Planning
Your retirement will be a deeply personal thing—spending your hard-earned money the way you want to spend it. All of these calculations will help you get prepared so that you can enjoy your time, so start thinking about them early and work at it until you understand all 10 questions. Financial literacy about retirement, you’ll find, will be essential to enjoying your golden years.

Read more of our content for America Saves Week: Teaching Kids to Save