How Much Do You Need

How much money will you need in retirement? This is the great uncertainty. Unless you have a crystal ball that can tell you how long you will live, how healthy you will be in the coming years, and how everything from the economy in general and inflation in particular will unfold in the decades that ensue, the fact is that there is no way to answer that question with rock-solid certainty.

One thing is certain, however. Too many people are attempting to retire on too little money. As a result, according to one survey, there are currently about seven million retirees who have returned to the work force, and a third of them because they need the money¹.

What should you do? Here are some guidelines to consider when you are planning your retirement:

• One helpful rule of thumb that comes up consistently in several studies says you will need 75% of your pre-retirement income to maintain your standard of living in retirement². So, if your household currently earns $80,000, you will need $60,000 a year in retirement.
• In terms of gross dollars, let’s say you will need an income for approximately 20 years. This is based on actuarial tables that say a man retiring at age 65 will live 16 years and a woman will have a life expectancy to age 85³. Going with the 20-year estimate, if you need $50,000 a year currently to retire, you will require $1,000,000 total over the next 20 years.
• Then there is inflation. Even if inflation is fairly modest, it can devastate purchasing power over time. For example, let’s say you retire on $50,000 a year in 2007. You live 20 years. If the inflation rate averages only 3 percent, by the time of your death in 2027, all other factors being equal, you will need $90,500 to maintain the same standard of living. If inflation averages 5 percent, you will need $132,500⁴.

¹ "When a Retirement is Not a Retirement," Associated Press, March 12, 2006. Survey conducted by Putnam Investments.
² "Getting Ready to Retire: What You Need to Know About Annuities," based on a study conducted by George State University, 2001.
³ Source: Commissioners 2001 Standard Ordinary Mortality Table. Ages rounded to next highest year.
⁴ Source: University of Illinois Extension inflation chart. (www.urbanext.uiuc.edu/ww1/14-14.html).

Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific financial product.

Material discussed is meant for general illustration and/or informational purposes only. Please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional guidance.

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