Brad Tinnon

Brad Tinnon

Estimating the Size of Your Retirement Nest Egg

How much money do you actually need for your retirement nest egg? While there are many factors that go into retirement, in this post you will learn about a 5-step process that will help you quickly and easily estimate what you need.

STEP 1: DETERMINE HOW MUCH INCOME YOU WANT IN RETIREMENT

If you’ve done any reading at all about retirement, you will hear many people say that you should plan to live off of 80% of your pre-retirement income. So, if you were making $100,000 prior to retirement, the so-called experts say that you should be fine with $80,000 per year in retirement.

I honestly think this is foolish. You are used to living life a certain way prior to retirement. Therefore, when it comes time for you to draw that line in the sand and retire, you should plan to maintain that same standard of living in retirement. After all, you will have much more time on your hands and will likely be involved in doing more leisurely activities, many of which may cost money.

So, let’s start to build out an example. For Step 1, let’s assume that you want an income of $100,000 per year in retirement.

STEP 2: DETERMINE THE AMOUNT OF OUTSIDE INCOME YOU WILL HAVE THROUGHOUT RETIREMENT

This would include income such as pensions, Social Security, or any income that will be paid out for your entire retirement. No need to include part time income or income that starts and stops as that is beyond the scope of doing a simplistic calculation. 

Continuing our example, we’ll assume that you won’t have pension income but will expect to receive $50,000 per year from Social Security. 

STEP 3: SUBTRACT STEP 2 FROM STEP 1 

Since you desire $100,000 of income per year in retirement and you expect to have $50,000 of income per year from Social Security, this means that you will need your retirement nest egg to provide you with the difference of $50,000 per year

STEP 4: ESTIMATE INFLATION

In our example, we’ve estimated that your retirement nest egg needs to provide you with $50,000 per year. However, that number is flawed as it is in today’s dollars. You must inflate the number to account for rising expenses over time. For our example, we’ll assume that inflation will be 3% per year.

To do this, multiply $50,000 by one of the numbers below depending on how long you have until retirement. If you will retire in:

  • 30 years multiply by 2.4
  • 25 years multiply by 2.1 
  • 20 years multiply by 1.8
  • 15 years multiply by 1.6
  • 10 years multiply by 1.4
  • 5 years multiply by 1.2

Let’s assume that you will retire in 10 years. Since your retirement nest egg needs to provide you with $50,000 per year then multiply this number by 1.4 to get $70,000. This is actually how much you need your nest egg to provide you each year beginning in 10 years. 

STEP 5: ESTIMATE THE SIZE OF YOUR RETIREMENT NEST EGG

Now that we know your retirement nest egg needs to provide you with $70,000 per year, we can do some easy math to figure out how big your nest egg actually needs to be at retirement.

All you need to do from here is divide $70,000 by 4%. The result is $1,750,000 and is the amount that you should aim to have in your retirement nest egg when you retire. This basically tells you that you can withdraw 4% (considered to be a prudent withdrawal amount) from your $1,750,000 portfolio each year, which equates to $70,000 per year of income.

CAUTION!!!

While this quick and dirty calculation is an easy way to estimate how big your retirement nest egg should be, you should understand that it does not take into consideration ongoing inflation in retirement, taxes, changing circumstances, paying off debt, income that ends at some point, maximizing Social Security income, what would happen in the event of a death, market downturns, number of years to retirement, number of years in retirement, investment rate of return, rising healthcare costs, etc.

Rules of thumb, online calculators, and even this 5-step process should be taken with a grain of salt. There are so many factors that go into each person’s unique circumstances that a more thorough analysis would be warranted. But none-the-less, our 5-step process should give you a general idea of how big your retirement nest egg needs to be.

I would love to hear your thoughts on how much of a retirement nest egg you think you need. What sort of steps do you take to estimate how much money you will need?    

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Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™
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