Quick Retirement Check-Up, See if You are On Track

by Kyle Buffo

Are you going to be ready for retirement? Last year 71% of Americans said they weren’t on track to save enough for their retirement needs. It’s hard to save for retirement and easy to ignore. Making a serious plan for your retirement is a big commitment, but even if you aren’t ready to design your entire plan, it is beneficial to do a Quick Retirement Check-up. Whether you are 10 years from retirement and making the final push or in your 20’s just thinking about starting a retirement fund, running through some numbers can help you gain perspective on where you are and how to prioritize your savings.

There are many sophisticated financial planning programs out there, but for this quick check-up I created a very simple Excel-based calculator HERE that takes less than a minute to work through. Obviously, due to its simplicity, this calculator is nothing more than a quick check-up, and I would highly recommend working with a professional to create a much more detailed analysis and a financial plan.

Below, I will walk through the basics of the retirement calculator, using example numbers and explaining some of the variable inputs needed. Some notes about the calculator:

  • Yellow fields are inputs
  • Hover over cells with red corner for more info

Quick Retirement Check-Up

Backward Engineer

There are a variety of ways to analyze retirement needs, but we are going to keep it simple since this is a quick check-up. The goal is to find a quick estimate of how much is needed for retirement and how much must be saved each year to meet your retirement goal.

Check-Up Calculation Process

  • Estimate Retirement Expenses
  • Calculate a Retirement Savings Goal that can cover the retirement expenses
  • Calculate a Monthly Savings Goal that will sufficiently fund the Retirement Savings Goal

Assumptions for our Example

For our example, we will use a couple each making $60,000 annually. Currently age 35, each has $10,000 in retirement savings. They plan to retire at age 65. We will use an average annual investment return of 8% and assume inflation of 2%. For a withdrawal rate (the percentage you can take out of your retirement investments each year in retirement without running out), we will use 4%.

  • Retirement Expenses

How much money do you need every month in retirement? Whatever answer you come up with, no matter what method you use, odds are you are going to be wrong. Tax consequences, lifestyle changes, market returns, interest rates, future income, and a million other things can change your projections. We can try to make good estimates for some of these factors, but you can never predict them all.

An easy way to estimate retirement expenses is to take a percentage of your current income. For our example, we will say the couple wants to replace 80% of their income in retirement. 80% of their current $120,000 of income is $96,000. Unfortunately, we need make some alterations to that number due to inflation. Using the Federal Reserved target of 2% inflation, we can better understand how far our dollars will go in our retirement.

Entering these numbers into part one of the template we see that 80% of $120,000 adjusted for 30 years of inflation is $173,891.

That means that $173,891 in 30 years would buy you the same as $96,000 today. The number may look big, but you need to keep the effect of inflation in mind.

Step 2 Retirement Savings Goal

Now that we know we know what number is needed each year in retirement, we can figure out how much is needed at the start of retirement to last through your whole retirement.

There are numerous ways to calculate this, but for this simple retirement check-up, we can use the old 4% rule. The 4% rule, developed decades ago and debated by industry experts ever since, assumes that withdrawing 4% from an invested retirement portfolio will allow you to safely make your way through retirement without running out of money.

This, of course, is an extremely simplified look at withdrawing money, but this number can be debated another time.

In step 2, we also factor in other sources of income in retirement. For our example, we are using an estimated $4,000 of combined income between the couple. You can use this link to get an estimate of your Social Security, or if you are closer to retirement, you may have already received more accurate estimates from the Social Security department office in the mail.

Using 4% for our withdrawal rate and our $4,000 of Social Security income, we can project that $3,147,275 is needed to sufficiently fund the retirement needs calculated in Step 1.

Look scary? Let’s dive into Step 3 to bring that number back into perspective.

Step 3-Monthly Savings Goal

In this step, we are trying to figure out how much we need to save each month to meet the Retirement Savings Goal calculated in Step 2. Again, this is a simplified version of estimating your savings needs, but it factors in investment return, time, and current portfolio amount.

By entering the Current Savings and Estimated Average Annual Return, we can break down that large Retirement Savings Goal of over $3 million to a monthly savings goal of $2,241.

This simple calculation to figure out the Monthly Savings Goal assumes you will save the same amount every month until retirement. In real life, very few people have the ability to approach savings this way. It’s more common to save less than that amount during your younger years, and when you are older and have higher income, increase your savings amount to make up the difference to reach your Retirement Savings Goal.

This example isn’t meant as an end-all retirement analysis, but rather a simple estimate to see if you are headed in the right direction. Plug in your own numbers, whether you are decade away and are prepping for your retirement or if you are making your first IRA contributions and want to know what impact your small savings can have.

Play with the different assumptions and see what happens with different scenarios. A great example, enter your information for your current situation, and then do it again but change your Years Until Retirement to 5 years less (starting to save for retirement 5 years later). In our example loosing 5 years of savings would increase the necessary Monthly Savings Goal from $2,241 to $3,042.

The Full Picture

Remember that this isn’t a complete retirement analysis. Many other factors like salary growth, additional income sources, inheritances, and additional savings goals like house, college funding, and vacations, will need to be factored in. Additionally, there are numerous other parts of a full financial plan including insurance, debt management, and estate planning that also need to be considered.

Use this quick Retirement Check-Up calculator to gain some perspective on where you are. Good or bad, you will be in a better place, knowing where you stand.

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