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An Exercise in Retirement Savings

If you are approaching retirement or just beginning to plan for it, you might be interested to learn that you may need 60% to 80% of your current annual income to maintain your current lifestyle in retirement. If that surprises you, you're certainly not alone. Many variables can affect your retirement savings goals, including where you want to live and the activities you plan to pursue. So, how do you determine the amount you may need for retirement and the amount you need to save each year in order to reach that goal? The worksheet below, which is based on calculations developed by the American Savings Education Council (ASEC) and can help you crunch the numbers.

Consider the hypothetical case of Henry. At age 50, Henry earns $50,000 per year. He estimates that during retirement he'll need 70% of his income ($35,000 per year) to maintain his current standard of living. While he does not have a traditional employer-sponsored pension, he does expect to earn $5,000 annually as a part-time writer. He also estimates that he'll receive $14,500 annually from Social Security. Now, let's take a look at your situation:

1. Required Income . How much money will you need per year in order to maintain your current lifestyle? Enter 70% of your current annual income as a minimum.

2.    Social Security.  Project the amount you expect to receive from Social Security. You can calculate an estimate of your future benefits online at, the Social Security Administration's website.If you are married and earn less than your spouse, enter the greater of either your own benefit or 50% of your spouse's benefit.

3.  Traditional Employer Pension . Enter the amount you expect to receive from your employer-sponsored pension plan.

4.  Earned Income . Enter your estimated annual part-time income.

5.  Retirement Shortfall . Subtract lines 2, 3, and 4 from line 1. This is an estimate of the amount of money you'll need each year to supplement the above sources of income.

Now that you've determined an estimate of what you'll need in retirement, as well as your shortfall, it's time to figure out how much you'll need to save to close the gap. Assuming a 3% constant real rate of return after inflation, a life expectancy of age 87, and Social Security benefits beginning at age 65, the following calculations can help you estimate the total amount you'll need for retirement. Note: These calculations do not represent the performance of any particular savings vehicle, and they are for illustrative purposes only. 

Keep in mind that  full retirement age  (the age at which you are eligible to receive full Social Security benefits) is changing. For a long time, full retirement age was 65. Due to longer life expectancies, that age is increasing gradually until it reaches age 67. This change began in the year 2000 and affects people born in 1938 and later. 

For comparison purposes, let's return to Henry. He plans to retire in 15 years, at age 65, and has managed to save $45,000. Based on his income requirements and his financial resources, Henry will need to save an additional $254,200 by retirement, or $9,474.40 per year.

6.  To estimate how much you need to save, multiply line 5 (the amount of your retirement shortfall) by the appropriate factor:*

Anticipated retirement age:              Multiply by: 

                                                55                                21.0
                                                60                                18.9
                                                65                                16.4
                                                70                                13.6

7.  Enter the current total of your savings, including any funds in retirement plans such as a  401(k)  or Individual Retirement Account (IRA) .

8.   Multiply  line 7 by the appropriate factor:*

Retiring in:                                                   Multiply by:                      

                                    10 years                                   1.3    
                                    15 years                                   1.6
                                    20 years                                   1.8
                                    25 years                                   2.1
                                    30 years                                   2.4
                                    35 years                                   2.8
                                    40 years                                   3.3

9.  Subtract  line 8 from line 6 to find the estimated amount of savings needed at retirement.

10.  To estimate the amount you need to save each year, multiply line 9 by the appropriate factor:*

Retiring in:                                                     Multiply by:   

                                    10 years                                   .085
                                    15 years                                   .052
                                    20 years                                   .036
                                    25 years                                   .027
                                    30 years                                   .020
                                    35 years                                   .016
                                    40 years                                   .013

This worksheet is intended to be used as a starting point to estimate what you will need to save for retirement. For specific guidance, consult a financial professional.

Your retirement may be years away or right around the corner, but either way, even small steps can bring you closer to your goals. Determining the amount you need to save each year in order to reach them is an important step in retirement planning. 

* Factors provided by the ASEC.

            Your Figures                                       Henry's Figures

  1.       $_________                                         $   35,000
  2.       $_________                                         $   14,500
  3.       $_________                                         $            0
  4.       $_________                                         $     5,000
  5.       $_________                                         $   15,500
  6.       $_________                                         $ 254,200
  7.       $_________                                         $   45,000
  8.       $_________                                         $   72,000
  9.       $_________                                         $ 182,200
10.       $_________                                         $9,474.40