Estimating Our Needed Retirement Nest Egg

Right now I’m reading Yes, You Can Still Retirement Comfortably! by Ben Stein and Phil Demuth, at the recommendation of my friend Trip of Musing Money. So far it’s pretty good. I’m not quite done, but as part of the book it gives you a step-by-step procedure to estimate the nest egg that you’ll need when you reach your desired retirement age. It’s all based on historical market returns and life expectancy charts which I’ll leave to those who buy the book, but here are the rough results for my wife and I together:

1) Estimate Post-Retirement Income Needed. A suggested estimate is 80% of your (expected) final salary when you retire. I’m going to estimate this at 80% of $120,000, or $96,000.

2) Factor in Social Security. They say you should then subtract what you expect from Social Security. You can use the SSA.gov Benefit Calculator for this, and then multiply by 75% or whatever you think is reasonable due to all the doom and gloom we hear. I’m pessimistic and think 0% is reasonable, so subtract $0.

3) Factor in Pensions. We have no current pensions, and don’t expect to get any in the future. Another $0.

4) Calculate Nest Egg. Find the proper multiple based on their charts and certain variables. Their earliest option for retirement is 60 years old, which is a bummer since we want to retire earlier than that, but it’ll do. So at 60, and at a 99% probability that my portfolio will allow us the income we want, and also a 99% chance we won’t outlive the portfolio, the multiplier was 21.3.

So, 21.3 x ($96,000 – 0 – 0) = $2,044,800. (inflation adjusted)

So a cool 2 mil by 60. Of course, this is dependent on the assumption that you are also investing as they recommend, which I haven’t gotten to yet. Per their charts, this also means we should be saving about $15,000 every year in tax-deferred retirement accounts every year starting now to reach this goal. Yikes! We put away more than that last year, but this year that may be tough.

p.s. If we assumed Social Security is 100% solvent, our Nest Egg Number would be more like $1.4 million.

Comments

  1. It’s hard to imagine generating that type of wealth. It only goes to show how you’ve got to let time and dedication be on your side!

  2. Any money that happens to come my way from Social Security is definetly going to be a bonus. I’m positive there will be something provided in 30 years when I retire, but, like you, I refuse to plan for it. If I can make it without, and I will, it becomes a slush fund or even a source for charitable contributions.

  3. Shouldn’t you dumb down that number (2.044m) to present value?

  4. The $15k number is at present-value, which I think is what’s more important I think as that’s the easier way to visualize the amount of money we’re talking about.

    Thanks for reminding me that I forgot to add that the $15k must be adjusted for inflation (+3%) every year as well.

  5. you’re in school but still have a household income of $120,000 annually. You have a rich wife!!!

  6. no, don’t count on social security. I put a $0 on that, too. Who knows what happens 30+ years from now with the deficit the country has.

  7. That’s why you must love your kids and hopefully that they will take care of you when you are old :)

    Well thats how it works in Asian countries.

  8. “…A suggested estimate is 80% of your final salary when you retire…”

  9. I don’t know about you, but over the course of decades I definitely expect my income to be hugely different than it is now…I couldn’t even start to guess, but I’d definitely be thinking higher than low 6 figures. (Even taking inflation out of the picture). However, instead of trying to guess what I’ll be making in 40-something years, I’ve been calculating off a number that seems to be a safe amount of money–triple our current expenses–because it’s a little less arbitrary.

  10. A better estimate would be a % of your expenses, not your salary. Ultimately, you want to have enough to cover your expenses!

  11. who can estimate the final salary when you retire? it should use the current salary in the formula…

  12. Whenever I’m doing retirement calcs, I always error on the conservative side:

    -You’ll need to save more money than you think
    -The market will not perform as well as you think
    -Inflation will be higher than you think
    -Your expenses will be higher than you think
    -Your income will be lower than you think
    -You’ll live until you’re 130…

    etc. :)

  13. This sounds weird, but I actually know very few people that ever retired, usually one person continues working in the family, or they just die before than. Kind of morbid.

  14. Retirement at 65 is a relatively recent invention. I think most people used to work on the farm or whatever until they dropped dead.

    Then golf was invented =)

  15. Yeah social security is racist, retirement only works for asian woman, since they seem to live forever.

  16. I’ve heard that 80% thing also… but I doubt it highly. Here’s what I’m thinking. 20% of 75k is 15k. So if you need to put away 15k a year, than if you are making ~75k, you are putting 20% into retirement. We can fudge those numbers some, but basically, that ~20% is close to what I hear you should save for retirement. Roughly. So, I think when “they” say you need 80% of your final salary when you retire, they are basically just taking into account that you don’t save for retirement once you are in retirement (duh!). So if you want the same amount of money to live on once you are retired, you need to plan on 80%. Now all that is good.

    My problem is that (in most situations), you don’t need the same amount of money to live on anymore! For example, your house is probably paid off. Your kids are on their own. Etc etc. Now, as they state things, they are correct. I just think the point should be made that sometime just before before retirement, a lot of expenses will start dropping away. And unless your lifestyle takes all that money and starts living it up big time, you’ll have more and more money to put INTO retirement. You won’t really *need* that 80% since once those expenses go away, you should have some extra montly cash to put away or do whatever with…

  17. First, remember that this is from the book, not me. That said, I used to think the expenses thing too. Many expenses will go down when you retire – saving for retirement, work expenses, etc.

    But many expenses will go UP – namely healthcare. That’s the big variable. Paying for your own healthcare at 60+ is going to be expensive. Non-medicare nursing home? Nurses aide? Crazy. Of course maybe travel and greens fees too =)

    There’s just so many variables, I think 100k a year is pretty conservative.

  18. The new conventional thinking is, you will need 100% of your income to retire. Also, 40 years from now, inflation will cause things to cost about 3 times more than they do now so I predict I will need about 3 times what we make now (I feel fairly confident our lifestyle have about topped out). I use 8% return which changes to 5% 5 years to retirement to forcast how much we will have. Remember, being old and without a job can be expensive. You have lots of medications, expensive health insurance, hopefully long-term care insurance, and prob. some traveling and/or hobbies to fill the time with.

  19. Simple, just ask your parents how much they need/use per year after they retired, and factor in inflation /interest rate to get the future value you will need when you retire, assuming you follow your parents’ spending habit :)

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