Saturday, January 21, 2017

How Much Retirement Savings Will You Need to Feel Financially Secure?

The $64,000 question for individuals and couples who are planning for retirement is “How much do we need to retire?”  This post will discuss some of the factors you might want to consider in developing a reasonable estimate of retirement savings needed, or your “number”, and encourage you to use our workbooks to obtain this number rather than simply guessing.

But first, let’s bring out Steve Harvey and play a little “Family Feud” to see what a survey says.   The 17th Annual Transamerica Survey Retirement Survey of American Workers posed the question of how much retirement savings is needed.  The results shown on page 50 of the survey were:

Estimated Retirement Savings Needs

  • Less than $100,000     15% 
  • $100,000 but less than $500,000     21% 
  • $500,000 but less than $1,000,000     21% 
  • $1,000,000 but less than $2,000,000     23% 
  • $2,000,000 or more     20%
The median answer was $500,000.  Somewhat surprisingly, the median answer in the previous year’s survey was $1,000,000.

Page 51 of the survey summarized the basis reported by respondents to make their estimate of retirement savings needed.  The answers reported were:

Basis for Estimating Retirement Savings Needed
  • Guessed     47% 
  • Estimated based on current living expenses     23% 
  • Used a retirement calculator     9% 
  • Expected earnings on investments     6% 
  • Read / heard that is how much is needed     5% 
  • Amount given by a financial advisor     4% 
  • Completed a worksheet / did calculation     4% 
  • Other     2%
Given that more than 50% of the respondents (47% guessed and 5% read/heard something) didn’t crunch any numbers to develop their estimate, perhaps it is not all that surprising that the median answer changed so significantly from the previous year’s survey.  And while it is more fun to play Family Feud with survey information rather than sitting down and crunching your numbers, you just aren’t going to get much useful information unless you look at your own situation and goals for retirement.  Below are some factors you will want to consider.  All of them will affect the estimate of how much you will need at retirement.

Factors to Consider When Developing an Estimate of Retirement Savings Needed at Retirement
  1. Are you planning for just yourself or for your household? 
  2. In addition to Social Security, what other sources of income will you be relying on in retirement?  For example, do you have a company pension benefit or do you plan to work in part-time employment after retirement (a popular answer in the survey)?  How will you use your home equity to fund retirement liabilities? 
  3. When do you (and your spouse) plan to retire and when do you (and your spouse) plan to commence Social Security benefits or other sources of income?  Do you have a reasonable estimate of what your Social Security benefits will be at different ages of commencement? 
  4. What is the standard of living that you and your spouse are trying to replace in retirement? 
  5. How will you address long-term care costs and other non-recurring costs, such as unexpected expenses and bequest motives? 
  6. What are your assumptions for future investment return on your accumulated savings, length of retirement planning period and future inflation? 
  7. Is your estimate based on today’s dollars or future inflated dollars? 
  8. How do you expect your spending to increase in retirement?  Will spending needs increase with expected future inflation or will spending needs decrease in real dollars as you age? 
  9. What does it really mean for you to “feel” financially secure?
Using Basic Actuarial Principles and our Workbooks to Derive a More Reasonable Number

The basic actuarial equation matching household assets and liabilities that is the foundation for this website is:


To solve for how much accumulated savings/invested assets are needed at retirement in today’s dollars, all we need to do is subtract the PV IFOS from both sides of the equation to obtain:

where these calculations are performed as of the expected time of retirement using today’s dollars.  The necessary calculations can either be performed using our Present Value Calculator spreadsheet (PVC) or either of our Actuarial Budget Calculator workbooks (ABC).  For example, using our ABC for Retirees, you would follow the process below.

  1. Enter expected IFOS data, expected PV future non-recurring expenses and assumptions about the future (including future increases in spending budgets) in today’s dollars as of your expected retirement age. 
  2. Solve for the current value of investments/accumulated savings that gives you your desired first year spending budget.  This current value of assets that produces this desired first year spending budget is your reasonable estimate of retirement savings needed, or your estimated “number” at retirement in today’s dollars.
While many individuals believe that Social Security will not be their primary source of income in retirement, historically it has been the primary source for a large percentage of retirees and, in today’s low interest rate environment, the relative value of this source of retirement income is even greater today than in prior years.  Therefore, it is important for most individuals to obtain accurate estimates of these benefits.  We discussed our recommended approach for obtaining reasonable estimates of these benefits using the Social Security Quick Calculator in our post of October 12, 2016.  If you use this calculator, be sure to check to see results in “today’s dollars.”

It is important to remember that in addition to covering the present value of your future recurring spending, your assets at retirement will also need to cover the present value of your non-recurring expenses.  So, those expected expenses for new cars and your kitchen remodeling will either need to be covered by your estimate for non-recurring expenses or by your recurring spending budgets.

The next step in estimating your number will be to determine your desired first-year spending budget and the assumption for how you want this spending budget to increase in years after your retirement.  Most people want to maintain their pre-retirement standard of living.  In fact, 59% of the respondents in this year’s Transamerica survey indicated that they expected their standard of living to stay the same or increase in retirement (page 25).  Well, what does having the same standard of living mean?  We believe a reasonable interpretation of having the same standard of living means that spending after retirement will be approximately the same as spending prior to retirement.  For most individuals or couples, this means they will need to replace somewhere in the neighborhood of 75% of their pre-retirement gross income.  This percentage assumes that the individual or couple was saving about 10% of pay prior to retirement and will no longer have work-related expenses or pay FICA taxes.  They will probably also have somewhat lower income tax requirements.  Individuals or couples who were saving more than 10% of pay prior to retirement may target a lower percentage of pay to replace the same standard of living.  Those who want to do a fair amount of traveling or have more expensive plans for retirement activities may wish to target a somewhat higher replacement rate. For purposes of calculating your first-year spending budget target in today’s dollars, the replacement percentage you select should be applied to your current gross pay.

Once you determine your number, you can use the ABC for Pre-retirees to see how much you may need to save each year to reach your reasonable estimate of retirement savings needed, or your “number” (both in real and in nominal dollars).

Lots of Levers to Pull

If you don’t like the answer you get using the process above on your first attempt, try again.  There are lots of levers you can pull to get a different answer.   For example, you can change:
  • Your anticipated retirement age 
  • Assumptions about the future 
  • Your target replacement rate or the rate of increase of your spending budget after retirement 
  • Assumed income from other sources (including part-time employment) 
  • Assumed non-recurring expenses, etc.
The idea here, however, is not simply to change data or assumptions until you get an answer you like, but rather to help you in your financial planning. 


No one really knows how much you will need to save for you to feel financially secure at retirement.  No one knows how long you and your spouse will live or what the future holds for you in terms of your spending, your health, your investment returns or for inflation.  For that matter, no one, except possibly you, knows what does or doesn’t make you feel secure.  So, the concept of a “number” that works for everyone is just ridiculous.  The best any of us can do is to make our best estimates about the future, plan accordingly and be prepared that our assumptions will probably be wrong.  Or, you can just guess.  It is up to you.