How much money will I have when I retire?

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If you're not among the lucky few who have a traditional pension plan, you need to know the answer to this question sooner rather than later. A better question to ask yourself is "How much money will I need when I retire"? Hopefully you have been contributing as much as you could to a 401k, IRA, or other individual retirement plans for years. If not, you'll need to start right now. Most likely you have no idea how this translates into retirement income. Luckily, arriving at the answer is not very difficult.

Calculate your monthly take-home pay

  1. Look at your pay stub and multiply the net amount, as appropriate, to calculate your yearly take-home figure. So if you are paid weekly, multiply your net amount by 52 to get your yearly number, etc.
  2. If you receive a tax refund each year, add that amount to the yearly figure.
  3. Subtract any work related expenses that you won't have once you've retired. (Include commuting expenses, work clothes, lunch, supplies, etc)
  4. Divide this number by 12. This is the income you'll need each month to maintain your current life-style.

Example:

Your net take-home pay is $47,000.

You usually get a tax refund of $3,000.

You spend $2,500 on commuting expenses and $1,500 on other work-related expenses.

Calculate your take-home pay as $46,000. (47,000 + 3,000 - 2,500 - 1,500)

Divide this number by 12. (46,000 divided by 12 = 3833.33)

$3833.33 is the income you'll need each month to maintain your current life-style.

Calculate your Social Security benefits

Go to the Social Security website and calculate the monthly benefits you'll receive once you retire.

If you expect to have retirement income from some other source as well, add that to the Social Security figure


Calculate the amount you will need to make up

Subtract the Social Security figure from your monthly take-home figure.

Example:

Monthly Take-home pay: 3833.33
Soc Sec (+ any other): 2332.00
=========
diff 1501.33

This means you'll need another $1501.33 each month to reach your desired monthly income. This difference will come from your retirement savings.

Calculate your target retirement savings

Multiply the monthly difference by 12 to get the amount you'll need to withdraw from your retirement account each year. Current wisdom suggests that you should have enough retirement savings to last 20 years.

401k Based Retirement
$1501.33 times 12 months = $18,016
$18,016 times 20 years = $360,320

To meet your target in this case you'll need to have $360,320 in your retirement account by the time you retire. The federal limit for individual contributions in 2013 is $17,500. If you are at least 50 years old, you can contribute an additional $5,500 "catch-up" contribution. These limits are in addition to any contributions made to your account by your employer.

Contributing a little extra now can have a big impact later. Calculating how much you will need to retire is essential and only takes about 5 minutes. Do it now!

Annuity based Retirement

Annuities are qualified plans that pay a fixed amount each year for as long as the investor lives. They generally pay about 5% annually, based on the amount of principle in your account at the time pay-outs begin. For example, if your account balance is $400,000 when you reach 65, you will receive annual payments of $20,000 for the rest of your life. Upon your death, beneficiaries will receive lump sum pay-outs, which vary from plan to plan. There are many different types of annuity plans. I transferred some of my 401k funds to an annuity plan with a guaranteed rate of return of 8%. That means that my principle will grow by at least 8% each year. If my investments do better than 8%, I'll get that better rate. When I'm ready to retire, my yearly payments will be locked in at 5% of whatever my principle is at that time, and that will continue as long as I live.

So continuing with the example above, if the principle on my annuity is $360,320 at the time of my retirement, I'll receive that same $18,016 each year, but pay-outs will continue for as long as I live rather than just for 20 years. Hopefully I'll live long enough for it to make a difference. With the economy as it is, I like the idea that my pay-outs are locked-in and can only go up. With my 401k, I always worried that my hard-earned money could be lost, and in fact, there have been several years where my principle went down despite contributions from my company and me.

If you're considering an annuity, consult a financial professional.

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Comments 5 comments

Phil Plasma profile image

Phil Plasma 5 years ago from Montreal, Quebec

Here in Canada the method you describe is more or less the same, though the social security amount you list is not nearly so generous here, so significantly more needs to be saved. You get a vote-up and useful from me - hopefully more people read this one and take your advice to start saving.


Bill Yovino profile image

Bill Yovino 5 years ago Author

Thanks again Phil. I forgot to include the twenty dollars a year I'll be earning from writing Hubs.


Marisa Wright profile image

Marisa Wright 3 years ago from Sydney

I'm sure a lot of people will appreciate this Hub! I'd suggest people need to think a lot more carefully about what work-related expenses they have - not just travel and supplies.

I had three years away from the work force, working from home. I recently went back to a part-time office-based job, and I'm shocked how much of my pay disappears on expenses I would never have thought of!

There's the morning coffees, the take-out breakfasts and lunches, and the dinners out if I work late and didn't have time to shop or am too tired to cook. If I do cook, it's more likely to be expensive steak and salad rather than a low-cost (but equally tasty) casserole.

Then (probably more so for women) there's the need to have my hair and nails done, stockings, fashionable work clothes, high heeled shoes, handbags etc etc. It's not that I was a frump while I wasn't working - but I have the time to do my own hair and nails, and I haven't needed the variety of "dressed up" clothing that I do now.

So I think it's worth trying to put a value on some of those things - take a look at what's in the wardrobe for instance - when trying to evaluate work expenses.


Bill Yovino profile image

Bill Yovino 3 years ago Author

Excellent points Marisa! I've been meaning to update this Hub and will elaborate more on work-associated costs. Many Thanks!


joym7 profile image

joym7 3 years ago from United States

You should also consider insurance and health care. They plays an important role whether you are retiring or not.

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