Calculating Your Retirement Savings Goal

Saving enough money to retire is a goal that nearly everyone shares (and those who don’t, maybe it’s time that changes). Also shared by most is the uncertainty of how much “enough” truly is.

I’ll say right now that determining the hard figure needed to retire comfortably is not a difficult calculation, but it’s also a moving target. You can calculate it today, tomorrow, and next Wednesday and get three different answers, and each of them will be wrong.

So, what do you need to know about determining your retirement nest egg needs?

It’s a simple time value of money problem (sort of).

If you know how much money you need each year to live comfortably, you can start your calculation. The dollar amount will be a multiple of that number, allowing you to withdraw that amount each year while staying below a 4% withdrawal rate.

However, because of inflation and other factors, the amount you need to live on today will not be the same when you reach your target retirement age—even if it’s only a few years away. You need to calculate what that dollar amount while factoring in some assumptions, including inflation, cost of living, investment returns, future changes in income and others.

And I can almost guarantee that whichever numbers you use and whatever the outcome is, it will be wrong.

Is it a waste of time?

The number is not going to be accurate, but that doesn’t mean you shouldn’t do the calculation. It’s impossible to predict how inflation will act, what the cost of living will be down the road and how markets will grow throughout your lifetime. If you could predict that, you’d be very, very rich.

What you do know right now (or, at least, you can rather easily figure out) is how much money you need to make each year to live comfortably. Your retirement savings goal will be a multiple of that number, such that you can withdraw 3 or 4% each year without depleting the account.

What I recommend you do is look at that number regularly—once a year is ideal—so you can continue to adjust your savings target accordingly.

The number is frightening.

That’s normal. It’s going to be a large number, because it will be your annual expenses multiplied several times. Don’t be intimidated by it.

If you’re staying at a 4% withdrawal rate in retirement, which I would say is the maximum you should plan for, you will need $1 million for every $40,000 of annual expenses. As time goes on and costs go up, $1 million is going to seem like less and less money.

If you recheck these numbers annually, the growth will seem less severe than if you check it now and only return to it in another 10 years.

The lesson:

It is impossible to know how much money you need for retirement but having an idea of a target number will make it feel more manageable and help keep you on track.

Run the calculations each year or so, and don’t be afraid to bring in a professional to help guide you towards your goal.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regards to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Brotman Financial Group, Inc. and BFG Financial Advisors are not affiliated with Kestra IS or Kestra AS.

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