Retirement Planning

How Much Money Do You Need to Retire? – Part 1 of 2

David Kenerson

David Kenerson

When many of our clients are 5-10 years from retiring, they often ask us, “will I have enough money to live on during retirement?” Here are the steps we recommend to help you determine if you have saved enough cash to live comfortably when you step out of the work world.

Step 1. Determine your monthly financial needs today by examining your expenses.

Go through your checkbook and allocate your expenses among the following categories, using an Excel spreadsheet or another simple organizational tool to record the expenses.

  • Housing – What are your monthly mortgage payments? Monthly utilities? Cost for home repairs and cleaning services? Yard equipment and maintenance? Pool equipment and upkeep?
  • Automotive – What is your monthly cost for insurance? Fuel? How much do registration fees and licenses cost? What’s your annual average for car maintenance and repair?
  • Personal – How much do you spend per month on clothing, personal care products and services (hair cuts, dry cleaning, manicures, laundry service, etc)?
  • Food and Drink – What is your average cost for groceries each month? Alcohol? Home care products like furniture polish, kitchen cleaner, etc?
  • Entertainment – On average how much do you spend per month for movies, concerts, travel, etc?
  • Second Home – What are the costs above for your second home, if applicable?
  • Taxes – What is your average federal income tax each month? State tax? Local tax? Social Security and Medicare taxes? (Use last year’s tax return for figures and then divide by 12 to get the monthly cost.)
  • Gifts – On average, how much do you spend on gifts each month?
  • Medical – What is your monthly cost for doctor and dentist visits? Medications? Medical devices (glasses, hearing aids, etc.)?
  • Hobbies – What do you spend each month on items related to your hobbies such as sewing, fishing, gardening, etc?
  • Charitable Gifts – What is your monthly average for charitable giving – including cash and checks?
  • Miscellaneous – What else do you regularly spend money on but that isn’t included in the categories above?

2.      Add any monthly credit card charges from all your credit cards to the total above.

3.      Total all the columns.

4.      Deduct expenses you won’t have during retirement.  If your expenditures look to go down after you retire, you might consider using a percentage of your current spending – i.e. 70% of your current monthly expenditures.  Think carefully here though because while you might spend less money, for example, on gas for your commute, you may spend more on things like travel or hobbies.

5.      The net total is what you can expect to spend per month in retirement in today’s dollars. (Keep in mind that today’s dollar will not be worth as much tomorrow.)

Come back next week for Part 2 of how to calculate your needed retirement totals.