Calculate Your Retirement Needs

Last week we looked at a breakdown of retirement and taxes. This week we break down retirement and take the plunge and show you how to save. 

We’re now ready to take the plunge. Let’s estimate how much more you need for retirement and how much you will need to save each year to get there. To show you how all this works, we’re going to step through the calculations with three different fictitious couples. Then we’ll tackle your own numbers. To make it easier for you to compare, we’ll make believe all three couples are 35-years-old. The husband earns $140,000 and the wife earns $60,000. In this case, we’ll assume the wife is working part-time and raising her family. As a part-time worker, the wife has no retirement benefits at work and it is up to her husband to finance her own retirement savings. We’ll use a ballpark estimate worksheet to see how well each of these couples is doing in meeting their retirement savings goals. We’ll estimate how much they need to save each year to reach their retirement dream.

Introducing the Couples
First, I’ll introduce you to the couples. Sally and Sam Spender are the live-for-today types. They aren’t worried about their retirement future and just want to enjoy what they have now. Neither of them participates in an employer-sponsored retirement savings programme. They spend everything they have and have accumulated significant debts, so they can’t save even if they wanted to do so. All their extra money goes toward paying down these debts.

Sita and Sean Shoestrings live week to week on their paycheques. They do realise the need for savings, and Scott participates in his company’s retirement plan. Scott puts in six percent of his salary, or $8,400, and his company matches 12 percent of his salary, or $16,800, for a total of $25,200. His current balance is $300,000. Sita, as a part-timer, has no retirement benefits, but she does deposit six percent of her earnings or $3,600 in a mutual fund each year to provide for her retirement. Her mutual fund is worth $30,000. Their total annual retirement savings is $330,000.

Camini and Sri Savers cut corners wherever they can and put retirement savings as a number one priority. They are hoping to retire five years early at age 55. Both are saving ten percent of their earnings. Sri puts $14,000 in his company retirement plan and receives a company match of 200 percent of $28,000. His pension plan is worth $510,000. Camini puts $6,000 into her annuity account per annum,  there is no company plan. Her annuity is worth $110,000. Their total annual retirement savings is $620,000.

Average Budget Needs
We’re going to make a number of assumptions for each of the couples about their retirement needs. We’re going to assume a retirement age of 60, which is when they will be eligible for full retirement benefits under NIS. Their active phase of retirement will be five years until age 65. Their passive phase of retirement will be ten years until age 75, and their dependent phase of retirement will be five years until age 80. In the active phase they will spend 90 percent of their current budget, in the passive phase they will need only 50 percent, and in the dependent phase they will need 80 percent.

Let’s compute a weighted average for their budget needs in retirement.
•Active Phase – five of 20 retirement years = 25 percent of 90 percent budget needs, which is 22.5 percent.
•Passive Phase – ten of 20 retirement years = 50 percent of 50 percent budget needs, which is 25 percent.
•Dependent Phase – five of 20 retirement years = 25 percent of 80 percent budget needs, which is 20 percent.

Adding these three weighted averages: 22.5 percent + 25 percent + 20 percent = 67.5 percent. In other words, the couples will need 67.5 percent of their current budget in order to have enough for their retirement needs. Since their current budget is based on a total income of $200,000, we will assume they need an average of $135,000 per year in retirement ($200,000 x 67.5 percent). For the husbands 67.5 percent of $140,000 is $94,500, and for the wives 67.5 percent of $60,000 is $40,500. (Continued next week)