If you are like me you have probably gone online and used a retirement calculator to try and figure our - how much do I need to retire? And you were floored by the numbers these calculators spit out. Your first reaction may have been there is no way I can accumulate that much, so I may as well forget retiring. So I decided to do my own research and analysis. I have a degrre in Math - so I can do the math.
For example: If you earn $50,000 a year at retirement many of the calculators will tell you that you need $1 million or more to replace your pre-retirement income. That is 20 years of earnings (and at retirement that is probably peak earnings). Your Social Security benefits may reduce that by 25% at age 62. Still, even $750,000 is a lot of money for the normal person to accumulate. Now if you started saving at 22 and managed to save every year for the next 40 years you may achieve that goal. But, if you were like me there were years when you barely earned enough to pay the bills (forget saving for retirement). So if you managed to save in 25 of those 40 years you did better than average.
So let's say you earn $50,000 a year at retirement. After income tax with holdings (Federal, state, local), FICA, Medicare, and 7% into a 401k your take home will be around $2,800 a month. This amount may vary depending on state and local income taxes and the number of dependents. Let's say pre-retirement your mortgage is $600 a month but it will be paid off by retirement. That means $2,200 a month should give you the same spending power as pre-retirement. You may also save on commuting costs, business clothing, lunch at work, etc. Let's also say Social Security will give you $1,200 a month at age 62. That leaves $1,000 to be made up from retirement savings (IRA, 401k or a retirement pension).
If we look at an immediate annutiy calculator we see that it takes about $17,000 to buy for a male age 62 a $100 a month income for life. So to supply that additional $1,000 a month of income will cost you about $170,000. This does not allow for inflation. Your Social Security benefits should be inflation adjusted (COLA - Cost Of Living Allowance) based on inflation. So let's say you need another $50,000 to cover inflation costs over your remaining lifetime or a total of $220,000 in retirement assets other than Social Security. Also, see post on living without Social Security.
This makes no allowance for long term care in a nursing home or hospice. Still it is a lot more achievable than $1 million or more. So that leaves you at risk if you encounter an extended care situation. Also, If you are married then simliar analysis applies to your spouse's situation.
So let's summarize - Social Security will furnish $1,200 a month and that is worth about $204,000 (12 x $17,000). Your retirement savings supply $1,000 a month ($170,00) and has a buffer for inflation ($50,000) for a total of $220,000. So the value of retirement assets including Social Security is around $425,000. To have an income of $2,800 (pre-retirement income) would require another $100,000 or so or about $525,000 in total.
So half $1 million of retirement assets (including the value of Social Security payments) should provide for you at retirement. If your are married and your spouse does not work he/she can draw 1/2 your Social Security as a spousal benefit (say $600) at age 62. If he/she works then to replace his/her income he/she will need retirement assets similiar to those described above. Depending on your income all or most of you Social Security income may be untaxed. See prior post on the Social Security marriage tax penalty.
To simplify this - your retirement assets (including the value of your Social Security benefits) need to be about 10 times your income at retirement. More is better. I would suggest 12 times your retirement income. So if your retirement income is $50,000 that would be $600,000 of retirement assets. If you are married and your spouse earns $50,000 also then you need 10 X $100,000 or $1 million or more (around $600,000 net of Social Security benefits).
Hope this has simplified a very complex subject for you.
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