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How Much Do I Need at Retirement

By Bob Moeller
WEAC Member Benefits

December 2003

Financial Planning Seminars
Achieving Financial Independence

I am going to begin this article with some major assumptions in order to show you how to calculate how much you need to have invested or “saved up” by the time you retire in order to live the same lifestyle after retiring without fear of running out of money.

The first assumption is that you will retire after a career in education. Assuming a full career such as 28 to 30 years, you will get about 62% of your final salary level gross from the Wisconsin Retirement System (WRS) if you use the accelerated option. If you are single, assume 66%, using the accelerated option.

The second assumption is that your spouse’s Social Security benefit at age 62 will equal about 25% of his or her gross income if it is less than $50,000 per year. It is assumed your “combined” WRS/SS benefit will keep up with inflation.

The third assumption is that you are currently living OK on what you gross, minus your TSA contributions.

Finally, I am going to ignore retirement income tax savings that you may eventually enjoy, but remind you that when you retire you will not pay Social Security taxes of 7.65% of your entire salary, assuming neither of you earn over $87,000.

You might want to make the simple calculations now. Take your current gross salary or salaries and multiply by .9235, thus removing your S.S. tax. Then, subtract your TSA contributions (or 457, or 401k). This is the “income before income taxes” you will need. Now assume the WRS accelerated option will duplicate 62% of your current gross and Social Security 25% of your spouse’s gross. The balance must come from your investments and/or your spouse’s retirement income. (See Example A.)

Example A: Assuming you earn $50,000 and your spouse $40,000
Current Gross Income
$90,000
Amount adrer S.S. Tax (x .9235)
$83,115
Deduct current $5,000 going into TSA
$78,115
Deduct current $4,000 going into spouse's 401K
$74,115
Approx. rounded gross needed (before taxes) if retired
$74,000
Amount from WRS Accelerated based on 62% of your $50,000 gross (Assumes 75% Survivor Option)
$31,000
Age 62 S.S. expected from spouse per S.S. statement (25% of current gross)
$10,000
Retirement Income expected from spouse
$2,000
Balance needed from investments
$31,000

Now the next big question is how much can you safely take out of your investments each year and not run out of money? Here’s a straight mathematical fact. If you can earn 5% on your overall investments over a period of time, you can withdraw 4% per year but increase that withdrawal by 3% each year for inflation and your funds will last about 33 years. Key assumption for you to make? You can’t withdraw much more than about 4% per year from your accounts if you expect to keep up with inflation.

So how much do you need invested? In the example above, the answer is: $31,000 divided by .04, which is $775,000. Now deduct how much you currently have invested, including 401k’s, TSAs, etc. Let’s say you currently have $250,000. The balance you need to accumulate, in today’s dollars, is $525,000.

Example B shows how much it takes each year, assuming you earn the 5%, to accumulate that much. Note, the final value needed will be higher by inflation, which is not taken into account here. You should assume at a minimum that your annual investment will have to be adjusted for inflation each year.

Example B: Accumulating $525,000, assuming 5% interest
Years until retirement
Divide by
Yearly amount needed
30
66.44
$7,901
25
47.73
$10,999
20
33.07
$15,875
15
21.58
$24,328
10
12.58
$41,732

The message here is to get started now! Please note that this is a very rough example. It is designed to get you thinking about your money needs in the future and give you an idea of how much you will need. Note that if your income drops in retirement, your income taxes will also drop. That makes the numbers a little more friendly, but realistically if your taxable income then is close to your actual taxable income now, there will not be large tax savings except in the omission of the Social Security tax.

Posted November 24, 2003

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