I checked out Kiplinger’s Retirement Savings Calculator to see what we should target for, once we paid off our house and begin building wealth.
One of the drawbacks of this retirement calculator is that you can’t actually put in your “real” current gross income if you are a high-income household. This is because the calculator assumes that you will require at least 50% of your current gross income to live on retirement and gives no option below 50%.
So if you come from a household income of $250,000 and you are relatively frugal and do not anticipate a sudden desire to drive a Bentley or sign checks using “diamond crusted fountain pens” (Joshua Kennon often refer to these luxury items because his company sells them) during your retirement years, you aren’t really going to need to draw $125,000 every year for living expenses.
Using fudged numbers that are below our household income, I compared our retirement targets for drawing $80,000 annually for living expenses versus $90,000 annually for living expenses:
Drawing $80,000 for Living Expenses = Target Retirement Savings of $4.2M
Drawing $90,000 for Living Expenses = Target Retirement Savings of $4.7M
A $10,000 difference in retirement living expenses can translate to a half-million ($500,000) difference in how much you have to save!
Caveats
You can play around with the numbers when you visit the calculator and test the different scenarios. The caveats with the way that I’ve used the numbers are these:
1. I put in $80000 or $90000 for both “You” and “Spouse” current gross income, so that I can then adjust to 50% of these to draw out during retirement. [50% of 2*$80000 is $80000] The calculator suggests 80% of your current gross income, and you may consider this based on how much $ you think you will need to draw annually for retirement.
2. I deliberately omitted social security and pension numbers. Both my husband and I would be entitled to social security benefits, since we have been contributing – but I’m not going to count any eggs that come from a government basket toward my retirement! I’d much rather put any social security checks I receive toward a 501(c)3 cause I’m supporting.
3. I used a very aggressive retirement age goal: 15 years till retirement. My husband and I are in our early 40s / late 30s. This calculation is based on a retirement age range of 53-57 years old.
4. I used a very conservative ROI: 6% returns – and only 35% of the investment would be in stocks during retirement years.
5. I used a relatively “safe” life span of 88-92 years old in the calculation. This means if we end up living into our late 80s and even hitting the 90s, we’d still be OK. If either of us croak before then, we’d be sorry but we’d still be safe. One of the mistakes people make is that they assume they’ll die sooner than they may actually die. And being homeless at age 90 isn’t my idea of a nice retirement.
If you use the “goals” function in Mint.com, you can also calculate your retirement savings and adherence to goal. The only problem with Mint.com is that if you aren’t linking accounts, then you will have to calculate only your portion of the retirement savings.
I found a blogger using the same calculator and looking at adjustments in the ROI % when determining what the monthly contribution toward retirement can be:
http://www.fiscalgeek.com/2010/09/saving-enough-money-to-retire/
I find that often people use a very optimistic rate of return – they go by 10% or more. I would prefer to err on the side of caution and put the returns at 6%-8%. This was the # that I had used in this article – and when I crunched the #s I looked at 2 potential numbers for income $80K / year for a couple versus $90K / year for a couple. The amount I got was a staggering $4M+ that was needed.
There are ways that you can protect your assets against risks that would easily deplete your savings: Ramsey fans for example will probably have term life insurance because he talks about this every chance he gets. This insurance would protect against death as well as catastrophic illnesses that put many people into trouble.
I’ve found that it’s often NOT just about the size of your nest egg that matters, but the strength of your wealth / asset protection that makes a difference in the security of your retirement.