How Much Do I Need at Retirement
By Bob Moeller
WEAC Member Benefits
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 || |
|Amount adrer S.S. Tax (x .9235) || |
|Deduct current $5,000 going into TSA || |
|Deduct current $4,000 going into spouse's 401K || |
|Approx. rounded gross needed (before taxes) if retired || |
|Amount from WRS Accelerated based on 62% of your $50,000 gross
(Assumes 75% Survivor Option) || |
|Age 62 S.S. expected from spouse per S.S. statement (25% of current
gross) || |
|Retirement Income expected from spouse || |
|Balance needed from investments || |
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
Yearly amount needed
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