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Preparing for Retirement - Part 3

Preparing for Retirement - Part 3

| November 15, 2023

Welcome back folks, it’s formula time! This week we are going to learn the formula that will allow you to figure out what amount you will need to save to achieve and maintain the retirement lifestyle you want. 

First, we start with the inventory you’ve taken based on our discussion last week and we look at what your salary is pre-retirement. We are assuming you want to replace 100% of that salary. Then you subtract what Social Security will give you on an annual basis. And finally, you multiply that remaining number by 0.045 which is a conservative estimate of the average annual return of your investments. What you get is the total amount you need to have saved for retirement. 

Pre-Retirement Salary - 

Projected Annual Social Security Benefit x 

Estimated Average Annual Investment Return = 

Your Retirement Number

Let’s look at how you calculate the amount of money you need for your personal retirement goal with an example.

We will assume you make $100,000 a year and so that is the amount of income you will need to replace in retirement. 

In this example, we have a married couple who will each get about $25,000 a year in Social Security for a total of $50,000.

Now they need to come up with another $50,000 per year to reach their income replacement goal of $100,000. 

How do they do that? With their retirement savings and investments. To determine the amount of money your investments will need to earn or grow by to generate that $50,000 per year in replacement income, you simply take an average of 4.5%, which is a conservative estimate of what retirement investments may earn over time, and multiply that by $50,000, your annual income need.

$100,000 - $50,000 x 0.045 = about $1 million

The answer is about  $1 million. This means, that to ensure that you are able to withdrawal $50,000 from your retirement savings per year you will need to have $1 million invested in your retirement accounts. 

But wait, there’s more…

What about inflation?

We will discuss that next week when we tackle the inflation question with the power of asset allocation.

Until next time…

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. 

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.