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Step 9: Make Projections

WHEN WE FIRST enter the workforce, we shouldn’t worry about precisely how much we need for retirement—and instead focus simply on socking away as much money as we can. Those initial dollars we save may seem like a drop in the bucket, but they should make a major contribution to our eventual retirement, because they’ll enjoy decades of investment compounding.

But around age 40, it’s probably worth sitting down and calculating how much we might have at retirement—and whether it’ll be enough. Start by getting a handle on Social Security and any pension income. Entitled to a traditional employer pension? To see how much you might receive each month once retired, check the latest benefits statement from your employer or contact human resources. Meanwhile, to find out how much you might get from Social Security, go to SocialSecurity.gov and click through to the Retirement Estimator. If you’re unable to use that calculator, try the Quick Calculator, also available at SocialSecurity.gov.

To supplement Social Security and any pension, you’ll have your retirement savings. One rule of thumb says that, to be financially comfortable, you need retirement income equal to 80% of your final salary. But if you’re a prodigious saver who regularly salts away 20% of income or more, rather than the often recommended 10%, you could be comfortable with just 60% or 70%. You might also make do with less if, by retirement, your mortgage will be paid off and the children will be off the family payroll.

Let’s say you will need $60,000 a year to retire in comfort and you’ll receive $25,000 from Social Security and nothing from an employer’s pension plan. That leaves $35,000 a year that will need to come from savings. To generate that income using a 4% portfolio withdrawal rate, how much would you need saved by retirement? If you divide $35,000 by 0.04 (or, alternatively, multiply $35,000 by 25), you’ll have your answer: $875,000.

How much would you need to save each month to amass your target retirement nest egg? Try the Savings Goal calculator at Dinkytown.net. Err on the conservative side by plugging in a 5% annual return and 2% for inflation.

Next: Step 10: Educate the Kids

Previous: Step 8: Plan Your Estate

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