Written by Hi, it’s Dre Griggs with Obsidian Wisdom. Today we answer the question, “How much money will I get after retirement?” You already know it depends on a variety of factors, and there are really five that we’re going to focus on today. I’ll even end by giving you a couple of case studies so you can see what that number looks like.
My goal today is to show you a couple of ways that you can quickly and easily figure out how much money you should expect to receive in retirement so that you can make any adjustments as you see fit. Now, of course, you could always just Google a retirement calculator. I have one on ObsidianWisdom.com/Resources. But if you just wanted to be able to take a sheet of paper and a calculator, you can figure out the amount we’ll discuss today.
Start with Where You Are Now
The first of the five inputs for determining how much money you should expect to have after retirement is knowing where you are now. This means understanding how much money you already have invested. This is important because it depends on where we’re starting.
Anytime that we’re going to put a plan together, think of it like a map or a GPS. You need to know two things: where you are and where you want to be. This helps us take into consideration the traffic, stoplights, highways, and different things along the way.
Gather Your Investment Information
You need to compile how much you have from different income sources like your 401(k)s, IRAs, Roth accounts, and other investments. Naturally, this can be a bit difficult and may take some time. But that’s okay. Give yourself time—maybe a week, two weeks, or even a month—to gather all these numbers. This way, you won’t feel overwhelmed by the process, and you’ll have an accurate calculation of your total investments.
Consider Additional Income Sources
If you’re expecting additional sources of income, such as a pension, annuity, or inheritance, decide how likely these are to materialize. For example, Social Security is very likely, so we’ll add that amount at the end when turning investments and savings into a monthly income. For potential inheritances, consider how confident you are about receiving them and the amount you expect.
Annual Contributions
The second factor is your annual contributions—how much money you plan to put into savings and investments every year until you retire.
Two Approaches to Contributions
- Goal-Oriented Approach: Decide how much money you need in retirement and back into how much you need to invest annually to reach that goal.
- Commitment-Based Approach: Determine a reasonable amount you can commit to investing each year. Calculate how much this will accumulate by retirement and adjust your lifestyle or retirement age as needed.
Time Horizon
The third factor is your time horizon—how long until you retire. This is simply the number of years you’ll be making contributions and allowing your money to grow.
Determine Your Retirement Timeline
If you plan to retire in 10 years, then your time horizon is 10 years. If it’s 15 or 20 years, use that timeframe. This will help in calculating how long your money has to grow.
Investment Return
The fourth factor is your expected investment return. This is the average return you expect from your investments. The stock market generally hovers around an 8-9% return on average, but this can vary based on your risk tolerance and portfolio allocation.
Average Investment Returns
Use historical data and your current portfolio to estimate an average return. This helps in projecting how much your investments will grow over time.
Withdrawal Strategy
The fifth and final factor is your withdrawal strategy. One common strategy is the 4% rule, which suggests you can withdraw 4% of your total savings annually without running out of money.
Calculate Your Annual Withdrawal
Using the 4% rule is straightforward and gives a good starting point. However, there are various withdrawal strategies you can consider based on your financial situation and goals.
Case Studies
Case Study 1
- Current Savings: $100,000
- Annual Contributions: $10,000
- Time Horizon: 20 years
- Expected Return: 6%
Calculations:
- Future Value of Current Savings: $100,000 * (1 + 0.06)^20 = $320,000
- Future Value of Annual Contributions: $10,000 * [(1 + 0.06)^20 – 1] / 0.06 = $388,000
- Total Retirement Savings: $320,000 + $388,000 = $708,000
- Annual Withdrawal (4% rule): $708,000 * 0.04 = $28,320
Add Social Security (approximately $22,000 annually) to get a total annual income of $50,320.
Case Study 2
- Current Savings: $150,000
- Annual Contributions: $15,000
- Time Horizon: 25 years
- Expected Return: 8%
Calculations:
- Future Value of Current Savings: $150,000 * (1 + 0.08)^25 = $1,028,571
- Future Value of Annual Contributions: $15,000 * [(1 + 0.08)^25 – 1] / 0.08 = $1,141,679
- Total Retirement Savings: $1,028,571 + $1,141,679 = $2,170,250
- Annual Withdrawal (4% rule): $2,170,250 * 0.04 = $86,810
Add Social Security to get a total annual income, adjusting for inflation over time.
Consider Inflation
Remember to account for inflation by increasing your annual withdrawal amount each year. This ensures your purchasing power remains stable.
Final Thoughts
By staying consistent with your contributions and making smart investment choices, you can significantly boost your retirement savings and enjoy a wealthy retirement. If you found this valuable, please like and subscribe to continue receiving insights on creating your own wealthy retirement system. Until next time, stay safe and enjoy life!
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