How Much Do I Need for Retirement?

This is the ultimate question for all of America; how much money do I need to save to retire? This number is a bit easier for those nearing retirement, like Baby Boomers and Generation X. But for us Millennials its hard to predict how much money we’ll need to retire comfortably in 30-40 years. Naturally our income is going to change during time frame. I found an equation that works well for all generations, including us Millennials.

Retirement Savings Calculator

The below equation is an inflation-adjusted calculation of what you would need in today’s dollars to retire. As I stated above, its hard to predict what your income will be in 10, 20, 30, or even 40 years. This retirement savings calculator allows you to project how much you’ll need at retirement, based off what you could retire and live off today.

C x (1 + I)T = R x 25

Key:
C = Retirement spending needs in today’s dollars
I = Projected annual rate of inflation (we’ll use 3%)
T = Number of years until you wish to retire
R = Retirement spending needs
25 = Multiply future dollars by 25 to account for future nest egg number (note: a number of academic studies support the “multiply by 25” theory, which is based of historical market returns and a 4% retirement withdraw rate).

Example Retirement Savings Calculation

Let’s use a hypothetical couple who is looking to retire in 25 years. Their gross annual income is $125,000, however, we can subtract their retirement savings and mortgage to account for what they would need (considering they should have a paid for home by retirement age and obviously no longer need to save for retirement).

$90,000 x (1.03)25 = $188,440 x 25 = $4,711,000

Based off the above calculation for our fictitious couple, their $90,000 livable income in today’s dollars would be equal to $188,440 in 25 years (when they plan to retire). That number is then multiplied by 25 to create a retirement target nest egg figure of $4.7 million. With a retirement nest egg of $4.7 million dollars you would safely be able to withdraw 4% annually from your account to live on, which would equate to $188,440/year.

This number may be a bit daunting to hit but it is reality. Millennials must save now and pay themselves first if they want to retire with a nest egg they can live off of. Time is on our side and so is the power of compounding interest. We Millennials must leverage this and save as much as possible as early on in our career as possible.

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