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An Estimate For Needed Retirement Savings

Tuesday, July 3, 2012 - 9:58 AM
Eleven times your final working salary.

That’s how much an average worker needs beyond Social Security payments, from sources like personal savings and employer benefits, to pay for retirement at age 65, a new analysis from the benefits consultant Aon Hewitt finds. The estimate takes into account inflation and post-retirement medical costs. And it is based on the retiree continuing to maintain the same standard of living.

An Estimate for Needed Retirement Savings -
ShorebreakShorebreak2,676 posts since
Apr 6, 2010
Rep Points: 14,530
1. Tuesday, July 3, 2012 - 8:50 PM
I prefer a somewhat different formula, since "final paychecks" can often be misleading. For example, due to certain peculiar rules regarding accrued leave, vacation time, overtime, you name it, and the fact many workers (if they can) "boost" their final year (or three years) for pension purposes, the calculation of "X" (pick a number) times final pay can mislead. Other workers (such as the self-employed) may see a radical reduction in their final years' take-home, as they become out-sourced or priced out of the market.

The standard formula (based on a 4% SWR) is:

Anticipated yearly expense in retirement minus [(after-tax social security) + (after-tax pensions) + (after-tax annuities)] X 25.

Example: Joe and Jane estimate they will need $10K/mo in retirement. After taxes, their social security, Joe's pension, and Jane's annuity cover half that. They need to generate another $5K/mo, after tax, from their IRA retirement accounts. Their effective (average) state and federal tax rate in retirement will be 10%, so the pre-tax should be roughly $5500/mo.* $5500/mo X 12 = $66,000 X 25 = $1,650,000. If Joe and Jane take a SWR of 4% from $1,650,000, they will harvest that $66,000, and it should last 30 years**, assuming the nest egg is in a "balanced" portfolio of stocks and bonds/CDs, and is age-appropriate.

*Purists will note the exact figure is $5555/mo, but I rounded down, since the math gets a bit funky. Some might note that this effective tax rate is low. I just picked it for my example. If your blended (average) rate is closer to 15%, simply divide 5000 by .85 to determine your pre-tax.

**Certain theorists question this, and suggest a SWR closer to 3.5% (or less), or a SWR with no inflation adjustments. Or a SWR which merely yields to the RMD. The brain begins to spin. Use common sense on your SWR. If your account tanks, tighten your belt a bit. Most likely, your RMD will govern.
BozoBozo137 posts since
Feb 14, 2011
Rep Points: 944