How Much Do You Really Need for Retirement?

Rachel and Ross, referred to Moneywatch Advisors by Chandler and Monica, are both 40-years old and want to know how much they should have when they retire. Given their combined income of $125,000 per year, we project they will need just over $3.1 Million in investment assets when they retire at 67 to sustain their current standard of living. What the what?! Keep reading to see how we arrived at that number.

Now, for real clients we would perform a deep dive into their current finances while determining their short and long-term goals, resulting in a comprehensive financial plan that would answer that question with much thought and analysis. Their personal financial plan would recommend how much to save, how to structure their portfolio and many other factors that will put them on the right trajectory toward their goals. But, since Rachel and Ross aren’t paying, let’s try a back-of-the-napkin calculation that will give them an idea.


• Their combined income is $125,000 per year;
• Their salaries will increase at 2.5% per year, on average;
• This analysis does not include any saving for college educations for their children;
• They will work full-time until age 67, when their full Social Security benefits begin.

First, their combined salaries will be $243,475 a year in 27 years when they retire. A decent rule of thumb is to estimate they will require 85% of that income in retirement. That equates to annual income of $206,953 which they will need to cover expenses when they retire at age 67.

Their first source of income will be Social Security. Based on their earnings history, the estimate for their monthly SS check is $2,127. That comes to $51,048 per year combined. Subtracting $51,048 from their total income requirement of $206,953 leaves $155,905 in annual income that needs to come from their investment assets, such as retirement accounts.

So, here is the question: How much do they need to have saved at age 67 to produce $155,905 in income each year without outliving their assets? Drumroll please – $3,118,100. We highly recommend they withdraw no more than 5% from their portfolio each year. Thus, 5% of $3,118,100 is $155,905. The reason we recommend a withdrawal rate no greater than 5% is so they won’t have to dip much, if any, into the principal of their savings and simply live from the earnings. Some advisors recommend a more conservative withdrawal rate of 4%, meaning Rachel and Ross would need $3,897,625 in investment assets at age 67.

This is a very simple example that only takes income into account, not actual expenses. It also ignores tax implications, that in real life, can’t be ignored. But, it does illustrate two important lessons: 1) Social Security will not meet your needs in retirement; 2) A financial plan with specific saving and investing goals is extremely important in order to meet your long-term needs.

Stay tuned for future posts to see how much Rachel and Ross, while not on a break, save in order to hit their goal.

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