Know how much you need to retire

How large a nest egg will you need to pay for a comfortable retirement? It’s an important question. But with so many unpredicatable variables involved – How much will you be able to save over the course of your career? How will your investments perform? How fast will inflation rise during the next several decades? – coming up with an accurate estimate can be difficult.

Nevertheless, to begin a long-term savings plan, we need to start with a target (and be willing to make adjustments as circumstances change over time).

For links to a number of online retirement calculators that can help you establish a retirement-savings goal, click here. Or use the simple table we’ve designed below.

In either case, here are a number of financial assumptions you can apply that could make your calculations reasonably accurate:

Inflation. Assume that the cost of living and your income will rise annually by 3%, the rate of inflation over the last quarter-century.* At that rate, a $40,000 annual salary today would grow to $83,751 in 25 years.

Return on your investments. Assume that your retirement assets will grow at an annualized rate of 8%. This is roughly the annualized return since 1926 of a portfolio with 50% of assets invested in large-company stocks and 50% in long-term U.S. government bonds.

Retirement needs. Assume that you’ll need 70% of your final year’s salary during retirement. Why only 70%? While individual circumstances are certainly different, you can probably afford a reduction in annual income because in retirement:

  • Your income taxes likely will be lower
  • You’ll no longer be paying Social Security taxes
  • Your children probably will not be living at home, and
  • Your mortgage will be paid off

Social Security's contribution. While Social Security was never intended to fully fund your retirement, assume that Social Security checks will replace 40% of your final salary.

Ready to see how much you need to contribute each pay period to your company-sponsored plan? You can use the above assumptions with one or more online calculators or the table below.

*For the 25-year period that ended in 2007, the annualized rate of inflation was 3.17%. Source: Bureau of Labor Statistics, 2008.

For example, let’s say you’re 40 years old, planning to retire at age 65 and currently earning $40,000 a year. Check the table. To build an adequate nest egg for retirement, you would have to contribute 7% of your income annually to your 401(k) (based on the assumptions we discussed). This year, your pre-tax contributions would total $2,800, or $108 each bi-weekly pay period. As your salary increased in future years, so would the amount of your contributions.

Need a financial calculator? Check these online sites.

Choose to Save®. Dozens of interactive calculators to help you plan for retirement, college savings, insurance needs, household budgeting, etc. For a basic, two-page, interactive retirement worksheet, try the Ballpark Estimate (click on the link in the right-hand column of the site’s home page).

Financial Calculators. More calculators for a wide range of financial planning questions.

Yahoo Finance. A highly informative website offering market news and commentary, stock quotes and personal calculators.

Past performance does not guarantee future results. Investing in mutual funds and other securities involves risks, including the possible loss of the principal amount invested. Fees and/or expenses apply.