6 Easy Steps to Figure Out How Much You Need to Retire

Before you can reach your lump sum goal, estimate the income required to support the retirement you want.

I've helped hundreds of people plan for and transition into retirement. I get questions every day about market direction, investment recommendations, tax efficiency and insurance requirements. However, the one question I receive more than any other is: "How much will I need to retire?"

This question is often followed up with, "How can I possibly answer that if I don't know how long I'm going to live? What are the markets going to do along the way? What about taxes and inflation?" The list goes on. While the question itself is simple, the thought becomes overwhelming with so many variables and everyone's situation being very different.

The problem is people are too focused on trying to save up to a lump sum number. The first thing you should be focusing on is how much income you are looking for in retirement. This is a very hard mental shift for people to make. We spend our whole lives simply saving and growing our money, and so we are trained to focus on a lump sum number. In retirement, we first need to focus on the income we want to live off of every month. After determining that, going through these six steps will make it very easy to come up with the lump sum number you need to reach.

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1) Find your income need.

Your income goal is the most crucial aspect of every retirement plan. Nobody is a fan of budgeting, but as you approach retirement, this exercise is crucial. If you haven't developed a budget, don't panic—make it simple. First, consider your fixed expenses—such as housing, transportation, medical, food, insurance, etc. Then, look at your discretionary expenses. Golfing or boating, travel or fine dining—these vary for everybody. With these expenses, you should start out with your goal amounts, not the bare minimums. It's pretty simple—all of these expenses will equal your income goal!

2) Optimize current income sources.

You will already have some income coming in, even after the paychecks stop—things such as Social Security, pensions, rental income, etc. Deciding exactly when to start claiming your Social Security benefits can make a big difference in your retirement income. You want to get this part right. The more you optimize income sources that are already built in, the closer you are to your retirement goal.

3) Figure out the income gap.

Step one showed you what your overall income goal is going to be, and step two taught you how much income you can already expect. However, the income already coming in probably isn't enough to meet your overall goal. If that's the case, now you know what your "income gap" is. This gap needs to be filled by all of the retirement savings, insurance contracts and investments you have.

4) Make conservative inflation and longevity assumptions.

There's a silent villain in your retirement plan called inflation. Whatever your income goal is, you have to adjust it upward for inflation for the life of your retirement. I suggest using 3% as an inflation target.

Also, we are all living historically long in retirement. Unless you have any serious medical concerns, you should plan for this income to continue until a minimum of age 90—longer, if possible.

5) Analyze legacy goals.

There's no right or wrong answer here, only what you care about. Do you want to try and maximize the inheritance that you leave behind someday? Or would you rather have the last check you write claim the last penny? This question determines whether your portfolio's principal needs to stay fixed, grow or can be spent down (as long as you don't run out). If you are okay spending down assets, then your retirement plan doesn't need to have as much. If you need your assets to stay the same or grow for an inheritance, it's going to require more for your plan to make it work.

6) Identify your investing style and risk tolerance.

Understanding who you are as an investor and what type of risk you are willing and able to take helps you recognize what type of investments in general you are comfortable with. Once you know what investments you will have, you can make informed assumptions of the rates of return your assets may have in retirement. It's important to know, however, that past performance does not indicate future results, so you should not rely on solely on that data.

Here's a hypothetical example. Mr. and Mrs. Retiree are age 65 and both retire. Their goal is $8,000 a month of total gross income. They have a pension of $1,800 a month and combined Social Security benefits of $3,500 a month. They want to make sure their income plan runs until age 90. They also have legacy goals and want to have at least $500,000 of their savings still there at age 90. We will assume 3% for inflation. We will also assume their short-term investments earn 3%, their intermediate-term investments earn 5% and their long-term investments earn 6%.

In this case, the couple needs to have $800,456 by age 65 to retire the way they want. Follow the six steps to figure out what your number is and start planning for your retirement today.

Bradley White, Investment Adviser Representative and insurance professional (CA license # 0K53785), is vice president of Epstein and White. He's a Certified Financial Planner™ and has a bachelor's degree in Finance from San Diego State University.

Steve Post contributed to this article.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Bradley White, CFP™, IAR
Founder and CEO, Epstein and White Retirement Income Solutions

Bradley White is founder and CEO of Epstein and White. He's a Certified Financial Planner™ and has a bachelor's degree in finance from San Diego State University. He's an Investment Advisor Representative (IAR) and an insurance professional.