Will You Have Enough in Retirement
Many people wonder whether they’ll have enough money in retirement. But not Marcia Lewis. Instead of worrying, the 36-year-old corporate controller, who has no company pension and no confidence in the ability of the Social Security system to pay her a retirement income, decided to figure it out. What she found was gratifying.
Lewis needs about $45,000 annually--$3,750 per month--to maintain her current lifestyle. After adjusting for inflation, she figures that will require about $12,000 per month 30 years from now.
But here’s the good news: She already has $215,000 saved and she’s socking away an additional $1,250 per month, or $15,000 every year. If she earns just 8% annually on her money while working--given the nature of her investments, that’s a conservative estimate--and she earns just 6% on her money when retired, she’ll have nearly twice as much money as she needs.
Want to know whether you’ve saved enough?
There are three potential sources of retirement income: Social Security, employer-provided pension and your own savings. (Note that although the long-term prognosis for Social Security is unclear, no one is talking about shelving the system.) You need to determine how much you’re likely to need in retirement, and then look to these sources of funding to see how much income, if any, they’re likely to generate.
The following work sheet should help.
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1. How much monthly income will you need in retirement?
What is you current monthly budget?
Subtract expenses that will cease upon retirement.
Add new expenses or increased expenses you expect.
Enter the sum here.
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2. Adjust for inflation.
Multiply your monthly retirement sum by the figure in the chart below that corresponds with the number of years you have until retirement and your inflation expectations. It may help to know that inflation has averaged 3.13% per year since the 1920s, according to Ibbotson Associates, a Chicago-based market research firm.
The result is your inflation-adjusted budget:
Years to retirement: 5
Anticipated inflation rate
3%: 1.16
4%: 1.22
5%: 1.28
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Years to retirement: 10
Anticipated inflation rate
3%: 1.34
4%: 1.48
5%: 1.63
Years to retirement: 15
Anticipated inflation rate
3%: 1.56
4%: 1.80
5%: 2.08
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Years to retirement: 20
Anticipated inflation rate
3%: 1.81
4%: 2.19
5%: 2.65
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Years to retirement: 25
Anticipated inflation rate
3%: 2.09
4%: 2.67
5%: 3.39
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Years to retirement: 30
Anticipated inflation rate
3%: 2.43
4%: 3.24
5%: 4.32
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Years to retirement: 35
Anticipated inflation rate
3%: 2.81
4%: 3.95
5%: 5.52
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Years to retirement: 40
Anticipated inflation rate
3%: 3.26
4%: 4.80
5%: 7.04
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3. How much will be provided by Social Security?
The Social Security Administration will estimate your monthly benefits if you call them at (800) 772-1213 and ask for an earnings and benefit statement. If you are a long way from retirement, however, you may want to factor in some type of change. If benefit formulas remain as they are today, the monthly stipend that Social Security reports to you will be adjusted for inflation. In other words, you’ll get more than what they tell you in the estimate. What if the system is changed and benefits are reduced? Your guess is as good as any. Lewis, for example, is guessing that she won’t receive Social Security because of substantial income from her own savings at retirement.
Enter the monthly amount you expect from Social Security:
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4. How much--if any--will be provided by a defined benefit pension offered by your employer?
A defined-benefit pension pays a set monthly benefit for life. Usually, the plan promises to pay a percentage of your monthly wage. The percentage is based on how long you worked for the company and how much you made, so you have to guess a bit on both counts. The younger you are, the trickier it is to estimate this.
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5. Consider how much your current savings will be worth.
Multiply the amount you already have saved by the appropriate multiplier in the table below. (savings) x (multiplier) = (what your current savings will be worth at retirement)
(Lewis would multiply $215,000 by 10.06 because she’s 30 years from retirement and figures she’ll earn 8% on her money. The result:$2,162,900.)
Years to retirement: 5
Estimated average annual return
6%: 1.34
8%: 1.47
10%: 1.61
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Years to retirement: 10
Estimated average annual return
6%: 1.79
8%: 2.16
10%: 2.59
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Years to retirement: 15
Estimated average annual return
6%: 2.40
8%: 3.17
10%: 4.18
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Years to retirement: 20
Estimated average annual return
6%: 3.21
8%: 4.66
10%: 6.73
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Years to retirement: 25
Estimated average annual return
6%: 4.29
8%: 6.85
10%: 10.83
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Years to retirement: 30
Estimated average annual return
6%: 5.74
8%: 10.06
10%: 17.45
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Years to retirement: 35
Estimated average annual return
6%: 7.69
8%: 14.79
10%: 28.10
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Years to retirement: 40
Estimated average annual return
6%: 10.29
8%: 21.72
10%: 45.26
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6. Determine how much monthly income that figure will generate.
Take the sum above, round it to the nearest thousand, drop the last three digits, then multiply it by the appropriate figure in the table below to estimate how much monthly income your current savings will generate.
Enter the result:
(Lewis multiplies 2,163 by 5.50--using age 106 as her life expectancy, to err on the side of caution--and will earn just 6% on her money. Still, her current nest egg will generate monthly income of $11,897.)
Number of years you expect to be living in retirement: 10
Estimated return on your savings while retired
6%: 11.10
7%: 11.61
8%: 12.13
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Number of years you expect to be living in retirement: 20
Estimated return on your savings while retired
6%: 7.16
7%: 7.75
8%: 8.36
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Number of years you expect to be living in retirement: 30
Estimated return on your savings while retired
6%: 5.99
7%: 6.65
8%: 7.34
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Number of years you expect to be living in retirement: 40
Estimated return on your savings while retired
6%: 5.50
7%: 6.21
8%: 6.95
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7. Consider the future value of your additional monthly savings.
Multiply the amount you’re adding to retirement savings each month by the appropriate multiplier in the table below.
Result: $
(Lewis is saving $1,250 per month and expects to continue to save this much monthly for the next 30 years. She multiplies 1,250 by 1,490.36 to find that her additional monthly savings will amount to $1,862,950 at retirement.)
Years to retirement: 5
Estimated return on your savings
8%: 73.48
10%: 77.43
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Years to retirement: 10
Estimated return on your savings
8%: 182.95
10%: 204.84
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Years to retirement: 15
Estimated return on your savings
8%: 346.04
10%: 414.47
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Years to retirement: 20
Estimated return on your savings
8%: 589.02
10%: 759.37
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Years to retirement: 25
Estimated return on your savings
8%: 951.03
10%: 1,326.83
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Years to retirement: 30
Estimated return on your savings
8%: 1,490.36
10%: 2,260.49
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Years to retirement: 35
Estimated return on your savings
8%: 2,293.88
10%: 3,796.64
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Years to retirement: 40
Estimated return on your savings
8%: 3,491.01
10%: 6,324.08
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8. Figure how much this additional savings will generate in monthly income.
Repeat Step 6, using the figure from Step 7.
Enter the result: $
(Lewis multiplies 1,863 by 5.50 to find that her additional savings will generate $10,247 in monthly retirement income.)
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9. Add your retirement resources
Add the results from Steps 3, 4, 6 and 8 to determine how much monthly income you are likely to receive in retirement.
Enter the sum: $
(Since Lewis doesn’t have a pension and isn’t expecting anything from Social Security, she adds lines 6 and 8. Result: Her monthly retirement income is likely to amount to $22,142.)
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10. Assessing the results.
Compare your estimated retirement income to the amount that you determined you need (Step 2). If the needed income exceeds what you expect to receive, you’re likely to have a leaner retirement than you planned. However, if your retirement income exceeds what you need, you can either scale back on your savings or, like Lewis, plan for really luxurious golden years.
It’s important to note that retirement planning involves guessing on a host of factors, including how much you’re going to earn on your money and how much you’re going to receive from pensions and Social Security. If things change substantially, you ought to do this estimate again. So save this chart, and plan to give your retirement account a periodic checkup.
