Estimate Your Needs
How much money do you need to retire? Follow these steps to come up with your savings goal.
Step 1:
Estimate how much you expect to spend during your retirement each year.
While everyone's situation is different, a safe approach is to plan on needing the same amount of income you have today. While certain costs, such as mortgages and work-related expenses, may decrease in retirement, others, such as travel and health care costs, may increase.
Step 2:
Add up your expected monthly income, excluding portfolio income:
- Social Security
- Annuities
- Pensions
- Other
Step 3:
Calculate the amount of retirement income you'll need from your portfolio each month.
- Estimate your annual spend, including taxes (from Step 1).
- Subtract your non-portfolio income (from Step 2).
- Subtract the appropriate level of income tax.
Step 4:
Determine how large your portfolio needs to be.
- According to the Schwab Center for Financial Research, if you want your portfolio to last 30 years, you should aim to have a portfolio that's 25 times as large as the amount you expect to withdraw in your first year.
Here's a sample scenario:
First-year spending goal (including taxes): $40,000
Less Social Security: $15,0001
So your first-year withdrawal is: $25,000
And 25 times your first-year withdrawal is: $625,000
In this example, your retirement portfolio target would be $625,000.