The Retirement Magic Number: How Much Is Truly Enough?
When you reach your 40s, an important question often comes to mind. Am I saving enough for retirement? If you are already thinking about it, you are on the right track. Awareness is the first step toward a solid plan. If you have not started yet, that is fine. What matters is to begin now and stay consistent.
There are many calculators available online to check whether you are on track for retirement. Most of them, however, ask for a long list of details and do not clearly show how they arrive at the result. In this article, I will share one simple way to estimate your retirement goal using only a few key pieces of information. You will need just the following inputs.
- What is your current annual family spending?
- How many years are you from retirement?
- How many years do you expect your retirement to last?
What is your current annual family spending?
Look at how much your family spends in a year today. You probably already know this amount, or you can check your bank or credit card statements to find it. Use your current annual spending as your baseline. This number will help you understand how much income you may need during retirement.
How many years are you from retirement?
How many years are you from retirement? You do not retire just because you reach a certain age. You retire when you have enough money to live the life you want. The idea of retiring at sixty five does not have to be your goal. It depends on what you want to do after you stop working. Take a moment to think about your plans and decide the age that feels right for you.
How many years do you expect your retirement to last?
If you retire at sixty, your retirement could last for thirty to forty years. Keep that number in mind. Some people make the mistake of planning their finances only up to age seventy five or eighty, thinking that will be enough. But when you calculate your retirement goal, it is safer to plan for a full life. No one should run out of money in their later years. It is always better to leave some wealth for the next generation than to fall short during retirement.
Calculating the magic number
Your projected yearly expenditure by retirement * number of years in retirement.
It's as simple as that. We only need to calculate your projected yearly expenditure by retirement. The key factor to consider in this calculation is the inflation.
You projected yearly expenditure by retirement is
current expenditure × (1 + Inflation Rate) ^ Number of Years to retirement
In the USA, considering how the last 5 years were, we can take average inflation as 4%. So, the inflation rate will be 0.04. In India, probably the inflation rate is 0.05 to 0.06.
Let's assume your family need is $100,000 per year today and you are 18 years away from retirement. First step is to calculate your future expenditure adjusted to inflation.
Current expenditure × (1 + Inflation Rate) ^ Number of Years to retirement
100,000 × (1 + 0.04 ) ^ 18
100,000 × 2.025
202,500
Now your magic number is 202,500 × number of years in retirement.
Say your number of years in retirement is 30.
202,500 × 30 = 6,075,000
You will need nearly 6 million for your retirement.
So, look at your retirement accounts (401k, IRA) and other accounts marked for retirement and see whether you are on track for retirement. You need to add some buffer for taxes. Suggestion is to add around 20% in the USA for taxes. If you are in India, your taxes might be bit low during retirement because withdrawals from retirement accounts like provident fund are not taxed in India as of 2025.
That's a wrap this week.
Happy learning!
