This is a question that keeps me up at night.
Am I saving enough money for retirement?
I have this nagging fear that I’ll be in my elder years and wind up eating cat food. It’s been said that fear can either cause the deer-in-the-headlights reaction or motivate you to do something. I’ve chosen the latter.
But how do you know if are you’re on track?
I’ve been writing for Investor Junkie for more than seven years, and this question is by far the one I’m most often asked. But it can be the most difficult one to answer.
You may have decades left until you’re ready to retire.
A lot can happen in those years. You could get married, have children, buy a house, etc. Or something horrible could happen, such as divorce or a family member getting sick. Add into the mix the fact that you’ve gotta pay bills, as well as events that are completely out of your control, like recessions, stock market corrections and wars.
All of these can take a toll on your retirement savings, with time lost along the way.
With your retirement, you have to get it right the first time.
There is no do-over.
The Simple Way to Answer the Question
So how much do I need in retirement?
What’s the easiest way to get the answer?
One method is to use 80% of your current expenses and multiply that by 20 to 25. This is a simple but potentially effective way to figure out how much savings you’ll need.
Let’s say you spend $60,000 a year. According to the formula, in retirement you’ll need approximately $48,000 per year to live. Now take that number and multiply it by 20 and 25 to figure out how much you’ll need in savings all told.
The answer you’ll get is $960,000 to $1.2 million.
Now, this formula isn’t perfect. It’s just a simple guideline. It doesn’t take into account Social Security, other fixed-income benefits, possible stock market returns and other major life expenses.
This is where a retirement calculator comes in to play.
Here’s the FREE Tool I Use
There are many retirement calculators out there. I’ve tested them all, but from my experience, only one comes close to being the best tool to plan for our retirement.
The one I recommend to my friends is Personal Capital’s Retirement Planner.
This tool is FREE to use and, in my opinion, is the best one available today — free or paid. If you want to find out more about Personal Capital, we’ve reviewed this service. The platform offers many other features, as well.
Not all retirement calculators are created equal. What separates the good from the excellent retirement calculators is a Monte Carlo simulation.
By using a Monte Carlo simulation, the tool calculates every possible outcome of stock market returns from today to retirement and from retirement to you and your spouse’s eventual death.
It’s some heavy mathematics and uses probability, but it will tell you the chances of retiring without running out of money.
The Personal Capital Retirement Planner has these features:
- Analyzes Your Actual Savings and Spending — It automatically pulls in your actual (not just estimated) saving and spending habits from within Personal Capital. Most other calculators ask users to enter this manually, which is time-consuming and error-prone.
- Accounts for Large Expenses — Quickly add large financial expenditures, other than just retirement. Most calculators assume your savings are solely for retirement and ignore major purchases like college educations or homes. Personal Capital’s Retirement Planner allows you to input these events, when you think they’ll occur, and how much they’ll cost. The tool recalculates to see how these expenditures affect your retirement goals.
- Large One-Time Savings Allotments — This feature allows for what people in the financial industry call “liquidity events.” Things like selling a business, exercising stock options or getting an inheritance. The Retirement Planner lets users add these inflows, so you can anticipate when they might occur.
- Covers All of the Possible Variables — The service includes taxes, inflation, withdrawals, saving increases, Social Security and spousal retirement.
- Buying a Home — Be it buying your first home, or perhaps even purchasing a second home in another state, Personal Capital allows you to plan this out.
- College Education — One of the biggest expenses today is college. In some cases, the price tag surpasses the cost of a home.
Best of all, the tool allows you to create many “what-if” scenarios with your finances: Increase your savings and see how it performs; or spend less in retirement and see how much longer it lasts.
Personal Capital is an excellent personal finance app that syncs your spending, saving and investing accounts. It's easy to use, plus it's free! Personal Capital has a powerful feature that completes a thorough checkup of your investment portfolio. However, its Wealth Management service, is more expensive than other robo advisors.
- Complete View of Your Finances
- Powerful Investment Checkup
- Support via Many Apps
- The You Index
- Easy to Use
- Custom Allocation of Unknown Assets
- Great Reporting
- All-Inclusive Wealth Management Fee
- Asset Allocation Is Not Customizable
- Budgeting Tool Needs Improvement
- Cannot Reconcile
- Expensive Wealth Management Service
- High Minimum for Wealth Management
- No Import Option From Quicken
Once you know the answer to the question of how much you need for retirement, you can head down one of two possible paths.
Either you’re on track toward a decent retirement and can take it easy.
Or — and unfortunately, this is the more common — you need to work on your retirement planning. I’m going to assume you still have a few years before retirement, which is good. But now you know you still have time to do something.
You can do things like increasing your savings, decreasing your expected expenses in retirement or possibly delaying retirement by a few years.
Knowing how much you need will at least help you sleep better at night.
Readers: What keeps you up at night about retirement?