How much Money do I need to Retire?


Retirement planning is a real headache for even the most proficient financial adviser or retirement planning professional simply because of the uncertainties involved in life. First of all nobody really knows how long he or she will live and how many defendants he or she might have at various points of time. On top of that, there are varying factors such as economic recession, critical illnesses, unprecedented calamities etc that can spoil all your calculations.

However, there are ways to calculate how much money you will need (roughly) under normal circumstances in order to retire gracefully and lead a peaceful life thereafter. All these calculations are always based on optimistic known factors and under predefined conditions, though. Also, the earlier you retire the more error prone your retirement calculation will be, because you have more years to live than you already did and the sample figures can go wrong.

Money needed to retire

The main assumption parameters for any retirement planning are the inflation rate, return on your current investments and average life expectancy

For example, in the US, the average life expectancy is around 78 years but most retirement calculations will assume a safer value of 85 years so that you don’t end up outliving the money. Similarly the inflation rate is typically capped at 3% for most calculation purposes in the US though other countries might have much higher inflation rates.

Since the amount required post retirement is a huge figure, you have to plan for your retirement from the day you get your first job


First you have to figure out how much you will spend. This is not an easy thing to do but you can still calculate it based on where it stands today. Post retirement, mostly you will end up spending a lot less than you spend today because usually expenses such as gas, work clothes, lunches out etc. On the other hand your health care expenses or cable TV expenses might go up. Based on your priorities, you may arrive at a monthly expense figure for your retirement life. This may be up to 20 or 25% less than your current monthly expenses. Let us call this figure ‘x’. You have to calculate the annualized (multiply by 12) number to arrive at an annual retirement budget or 12x.

Next you have to figure out how much more will you need per month apart from your social security and annuities to meet the ‘x’ mentioned above. For example, if your retirement benefits per month amounts to y, you still need (x – y) per month which you can call the shortfall per month.

The retirement planning is all about covering for that shortfall annualized and multiplied by the number of years after your retirement and till you die.

i.e. 12 * (x – y) * your remaining number of years. Let us call this value ‘z’.

Basically, you have to find a way to cover for this shortfall of ‘z’ using your 401-k plans, interest on your savings account or any other income that you might have and saved up. This is exactly the money needed to retire.

Consuming your retirement money

Researches show that if you are retiring at normal retirement age group (i.e 60 to 65), you can withdraw up to 4% of your retirement money per year parked in various accounts. For example, if you have retired with one million dollars, you can withdraw $40,000 in your first year post retirement. However, if you are retiring at a ‘young’ age of 45 or 50, you cannot afford to withdraw more than 3% per annum to meet your post retirement life. These figures are based on research data for the past several decades.

Please note that the calculation will hugely vary for those countries that have very high inflation rates. Basically in that case, the returns on investment is way below the skyrocketing living expenses and hence take the help from a financial adviser in your area to plan your retirement life.