Develop a Retirement Formula to Guide Savings

Physician's Money Digest, June 2007, Volume 14, Issue 6

Money

While there is no clear-cut formula tocalculate how much money you will needfor your retirement, a recent article inbreaks down the basics. First, takeinto account two large changes to yourfinances after retiring—less income andincreased health care costs, and then thereare other deductions to incorporate. Forexample, you'll face lower taxes due to alower income; you will no longer have topay Social Security and Medicare tax; youwill no longer dedicate 5% to 15% of yourincome toward your retirement savings;housing costs are typically lower forretirees; and you will probably spend lessmoney on clothes and commuting.

Money

That being said, other factors to weighinto your savings goal depend on whenyou'll retire or whether you'll work parttime;if you plan on dying broke or leavingan inheritance; the location of your homeand how much will be paid off; and thelifestyle you choose (eg, do you plan ontraveling, etc). Once you've estimated theannual income you deem necessary foryour retirement years, suggestscalculating your lump-sum savings target.First, subtract Social Security and any pensionincome from that annual calculation.Multiply by 25. The formula assumes thatyou will follow standard investing adviceand spend only 4% of your investmentportfolio the first year, and increase thedollar amount each following year to keepup with inflation. That final number is yourestimated retirement savings goal.