When Can I Retire? This Formula Will Help You Know
Published on September 1, 2017
If you’re like most working people, you don’t plan to hold down a job forever. Whether you plan to devote your days to playing golf or spoiling grandchildren, the question of “When can I retire?” is probably on your mind.
However, there’s another question to ask: How much do you need to save to retire?
Retired people worry about Social Security, inflation, and health care costs—but these all boil down to: “How much can I safely spend without running out of money?”
The facts are a little scary. Let’s say you want to plan for a 30-year retirement. Research1,2 shows that spending 4% of your nest egg per year and increasing that spend by the amount of inflation gives you a 95% chance of not running out of money. Spending 5% reduces your odds of success to 82%, and taking out 6% per year cuts them to 61%. And this all assumes your portfolio continues to grow.
If you are already retired, simply withdrawing 4% might be too simple, but for estimating your future need it’s a great place to start. This means, to estimate the amount of money you need to have saved in today’s dollars, divide the amount you’ll want to spend each year by 4%.
“To keep the math simple—for every $40,000 of annual income you want in retirement, you need to save $1 million.”
Yes, that’s a lot of money!
The next question is, of course, How much money will you need each year to live on? The rule of thumb was once 80% of your current income. But that assumed you’d paid off your mortgage and your taxes will be lower. Many people will still have mortgages. Since a large part of a retirement income comes from withdrawals from retirement plans that give you taxable income, your tax rate might not go down much. Plus, most people want to travel or spend money on hobbies in the early years of retirement, and many will need expensive health care as they live into their 90s and beyond. That means you might need more than your current income to support your lifestyle. We recommend you plan for at least 100% of your current income.
If you are eligible for Social Security, and believe that it will be there when you retire, that can reduce the amount you need to withdraw each year. Social Security is based on the amount you paid in. For example, a person retiring in 2022 who paid the maximum for at least 10 years might expect about $32,000 per year at full retirement (age 67). Someone who paid less than the maximum would get less. Social Security has a calculator that can help you estimate your benefit.
The Retirement Savings Formula: Start with your current income, subtract your estimated Social Security benefits ($0 if you don’t think it will be around), and divide by 0.04. That’s your target number in today’s dollars.
Nobody knows what the future holds—tax rates, inflation, health care reform, and Social Security are all outside your control. But the amount you save and invest is not. The good news is that you have time.
At SoFi, we’re here to help you get started saving for retirement. Talk with an advisor about your investment strategy.
SoFi Wealth, LLC does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.
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 William P. Bengen, Determining Withdrawal Rates Using Historical Data, Journal of Financial Planning, October, 1994 http://www.retailinvestor.org/pdf/Bengen1.pdf
David M. Zolt, Retirement Planning by Targeting Safe Withdrawal Rates, Journal of Financial Planning, October, 2014 https://www.onefpa.org/journal/Pages/OCT14-Retirement-Planning-by-Targeting-Safe-Withdrawal-Rates.aspx