Many people often ask how much money they would need to retire comfortably.   The answer of course is different for everyone.   It really depends on how you want to live out your golden years. Some may just stay in one place until they die – boring…, others may travel the world, and many others may do something else – volunteer service, spend time with grand kids, etc.  Hence, different retirement values for everyone.

However, I have decided to give my readers a framework they could use to estimate how much nest egg they would need depending on some variables applicable to them.

Back of the envelope calculation

In order to get an idea of how much you need for retirement, you need to account for all the possible expenses you may incur when you retire.  Add them up.  Then, you need to assume how many years you would still live.   Multiply that total cost you just calculated by the assumed number of years.  The ending value is the amount you would need.

Example

Let’s assume that you are retiring today in 2016.   You are 65 years old.  You only have your house mortgage payments left to pay for the next 10 years.  All your kids have already graduated from college and therefore, you no longer have any of the costs associated with raising children (extra-curricular activities, college matriculation, additional cars, etc.)  Given the above, the list below may be your cost assumptions (clearly this will vary depending on where you are living):

• Mortgage: $10,000,
• Food:         $5,000
• Phone:      $2,000
• Medical:   $15,000
• Utility:     $2,000
• Car Maintenance/Gas: $1,000
• Travel: $4,000
• Others: $5,000

Total: $44,000 (note that home mortgage payment goes away after 10 years, so this becomes $34,000 after year 10).

This $44,000 in after tax cash is what you would need to sustain yourself in 2016.

Now, let’s say you are still healthy at 65 and may have another 20 years to live (die at 85).  Hence, assuming that you’d incur the same costs for the next 20 years, then this means you would need $780,000 ($40k x 10 years + $30k x 10 years) for your retirement.

Other considerations

The reality is you will need much more than $780,000. Medical costs go higher each year due to inflation.  You also have to consider contingencies like needing a new car down the road, fixing the roof of your home, grandson/granddaughter getting married, etc.   There’s just so many things that could happen in the next 20 years, positive or negative.  So, it is important to conservatively assume a higher cost expense.  For my assessment above, I would increase that $900,000 to $1,000,000.  The higher the number the better.

Note:  It’s important to start thinking about saving and net worth now.  The more you understand these concepts and apply them, the better you are off with your retirement.