Everyone’s financial retirement needs are specific to them. Some folks just need or want more money than others. Do you dream of a retirement filled with frequent first-class globetrotting? Or, do you envision simply spending time with the grandkids, volunteering in your community, and taking a couple of modest vacations each year?
How to apply basic math to determine what to save to meet your retirement needs
No matter your particular retirement wants, you’ll need adequate money to finance your daily, monthly and yearly costs. Whether you plan on spending $5,000, $10,000 or $20,000 a month during these golden years, the same math applies to building your nest egg.
Let’s start with dissecting an example by way of a couple I recently met. This husband and wife live in Manhattan. They work at great jobs and bring in a combined $40,000 per month. After taxes and a hefty amount devoted to savings, they net about $20,000 for expenses. Incidentally, this is exactly what they spend each month.
Now I realize that $20,000 a month in living costs is a lot, but New York City isn’t cheap. This couple has a big mortgage, condo association dues, young children, a nanny, a car, monthly parking fees…the list is almost endless.
During our meeting, the two wondered what it would take to retire and have the same steady $20,000 a month in income. Let’s run through the math for this example, and then look at two other common monthly income benchmarks: $10,000 and $5,000.
Before we begin, there are a few important notes of which to be aware. As we mentioned above, our New York City couple currently nets only about 50% of their gross take-home pay due to their high tax bracket and high contributions to their retirement savings accounts. For our illustrations, we will assume a much lower overall effective federal income tax rate, and we will also assume that the couple will move to a lower income tax state, like Georgia, when they retire. And our “take home” nest egg numbers could actually be lower, if your assets are split between qualified account (IRAs) and after-tax accounts (brokerage accounts), due to the varying tax treatments on each account type.
Now let’s dive in:
How to get to $20,000 per month:
In these calculations, we are using a 25% overall effective tax rate, which includes 22% to federal income tax and 3% to Georgia state income tax.
The Annual Goal: $320,000 – 25% taxes = $240,000 or $20,000 per month
The Monthly Goal: $26,660 per month gross in order to net $20,000
These high earners will probably be eligible for Social Security benefits in the $5,500 per month range, combined, which gives us $66,000 gross annually.
This couple still needs $254,000 in gross income to reach their $320,000 gross benchmark.
Here’s the math: $320,000 – $66,000 = $254,000
Investment Income: $254,000 gross, or $21,166 per month. Assuming a 4% withdraw rate, in retirement they would need to have $6,350,000 stashed away in retirement savings.
Yep, over $6 million. Life in the Big Apple ain’t cheap.
How to get to $10,000 per month:
In these calculations, we assume a 22% overall effective tax rate, which includes 20% to federal income tax and 2% to Georgia state income tax.
The Annual Goal: $153,846 – 22% taxes = $120,000 or $10,000 per month
The Monthly Goal: $12,820 per month gross to net $10,000
Social Security for these earners likely will be around $3,500 per month combined, which gives us $42,000 gross annually.
This couple still needs $111,846 in gross income to reach their $153,846 gross benchmark.
Here’s the math: $153,846 – $42,000 = $111,846
Investment Income: $111,846 or $9,320 per month. Assuming a 4% withdraw rate in retirement, they would need $2,796,1500 in retirement savings.
So, about $2.8 million to have that $10,000 per month to spend.
How to get to $5,000 per month:
In these calculations, we assume a 15% overall effective tax rate, which includes 15% to federal income tax and 0% to Georgia state income tax.
The Annual Goal: $70,588 – 15% taxes = $60,000 or $5,000 per month
The Monthly Goal: $5,882 per month gross to net $5,000
Social Security for these earners will be somewhere around $3,000 per month combined. This translates to $36,000 gross annually.
They still need $34,588 to reach their $70,588 gross goal.
Here’s the math: $70,588 – $36,000 = $34,588
Investment Income: $34,588 or $2,882 per month. Assuming a 4% withdraw rate in retirement they would need $864,700 in retirement savings.
Here, we see that they need less than $1 million. And, if this family had pension income of just $1,000 per month or $12,000 per year, it would cut their nest egg need down to $564,700.
The numbers go like this: $34,588 – $12,000 = 22,588/.04% = $564,700.
A final thought
As I said, everyone’s retirement money requirements will be different, depending on particular wants and needs. But using this straightforward method of determining your monthly spending and working backward from there works for everyone, no matter if you need $3,000 or $30,000 a month. So, plug in where you want to be and map out your path to getting there. It could be a lot more accessible than you initially thought.
Disclosure: This information is provided to you as a resource for informational purposes only and should not be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. There will be periods of performance fluctuations, including periods of negative returns. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.