How much do you need? A retirement calculator

Yesterday Maria published a post suggesting that, for a fulfilled life in our pre-dotage before we are off to the commune, we will need to amass some £2.5 million ($4 million) of savings and investments over the next 5 years.  This will enable us to travel around, spend time in various countries, write books, fly aircraft and generally become independent during our retirement.

How to get there is another story but today I show how this calculation was done and publish the simple spreadsheet that I wrote.  You can download the spreadsheet here so feel free to do that now.

Income11 How much do you need?  A retirement calculator

Most of the cells in the spreadsheet are protected – the only ones you need to alter are the ones in green.

This doesn’t actually say how much you need – you merely change the numbers to suit your situation until it gives you the result you need.  There are just too many imponderables to provide an automatic facility!

These are the numbers you need to enter:

  • Your actual ‘retirement’ age is the first entry.  In the UK it is possible to retire at 55 and draw your reduced pension so, apart from this being appropriate for Maria, I have entered this age in the first row (cell B2).  Just to keep the under-40’s happy, there are enough rows for you to retire at 40 and see how much you will need if you survive to 100!  The rest of us can ignore surplus rows.
  • I then assume that there is some base income, after tax, that could be a pension, rental income on property you own or some other source which does not affect your investments.  For us, our two pensions combined should give an income of about £45k a year if Maria chooses to draw hers at 55.  As an income, I assume that it will rise a bit with inflation and have set a value in these sums of 2% per year.  These values are the next two rows of the green box.
  • Next comes the big one.  Just how much are your investments worth?  We have estimated, using this tool, that we will need about £2.5 mllion so that is the next value entered in the fourth row.
  • The investment yield is next and here I have assumed 3% – after tax.  If the investments are held within a SIPP or ISA for example (tax-free havens like 401(K)s or IRA where you don’t pay tax on the money you take out) then the yield should be a bit higher – even a lot higher!  Try 10% for fun.
  • The next row is an estimate of your annual needs – again after tax.  We reckon that £10k ($16k) a month cash should see us nicely comfortable, given that we will have no mortgage to pay.  For this, you can rent an apartment in most cities in the world and have enough to live comfortably on while writing that book. And of course we don’t want to fly economy/coach everywhere do we?  Long haul is pretty uncomfortable that way.
  • This value will increase of course and the next row is the spending inflation – I have also set that at 3%.
  • Now c omes the difficult bit.  We all assume that we will go on for ever but in fact at about 80 years old, many people do effectively hang up their boots and settle down to read the paper every day.  We assume this will happen to us as well so that, after the party, we will come home and either require assistence or actually go into a home.  Note that we don’t consider selling our home at this point – that’s a bonus I guess!  Anyway the next row is just that age when we pull the shutters down and we have assumed 80 for now.
  • We don’t of course know how much this will all cost so I have added two rows to set the current price of care (ie how much are people paying today) and the care cost inflation which I suspect is rather larger than general inflation.  I have set these two values as £50k ($80k) and 5% respectively.

As you change the values in the green block, the actual values in the year-by-year table will change.  Everything will be fine until your investments decrease to zero.   At that point, you will need to decide whether there are cheaper ways of surviving, to sell your home or go and impose yourselves on your offspring. icon smile How much do you need?  A retirement calculator  Having for a long time said I didn’t want to retire, I am now looking forward to retirement!

The second picture shows exactly this and that, by 90 years old, we will have run out of investments as both the Investments column and Yield column are zeros.  Phew.

Income2 How much do you need?  A retirement calculator

You can play with this tool – it will surprise you just how little money you actually need, particularly if you have some base pension and don’t want to live it up too much.  Download it here. Just as an aside, if you have £10 million and feel like spending £300k a year cash until you are 85, this tool shows that you can survive in an upmarket care home until you are 100!  So now you know.

What’s more, as someone who unwisely invested in a pension plan for a short time that I can’t access, doing it this way is not only cheaper than buying annuities, which just profit the insurance companies, but enables you to access your retirement funds when you need.  And as annuity rates are going down, it is an even better bet!  If you still feel the need to buy an annuity, you can always take up smoking or other risky habits… As a guide, a 55 year old woman in good health buying an annuity, which would be worthless in the case of an early demise without a guarantee, would generate some £90k a year which would be taxed at (say) 40% so leaving £54k which with the £45k basic is some £21k less than planned here.  A suitably written will in our proposals would ensure that, however much we didn’t consider it, the benefit would carry on being paid to heirs and successors which would otherwise benefit the insurance company.

27 thoughts on “How much do you need? A retirement calculator”

    1. This is indeed important @Paul. There have been a number of cases here in the UK where people have had to sell their homes to afford their care and various financial ‘products’ have evolved to delay that. For very low income there is a small amount of state-aided care but above quite a low level, it is not generous.

      If you play with the tool at a relatively prudent spending level and delay going into care as long as possible, the costs can increase to the point where they are as much as your planned spending level.

  1. I think this looks pretty planned out to me. We have pegged an approximate amount we will need for retirement but we haven’t finalized the details yet. It does help that we have government defined benefit pensions to add to our income. 

    1. @MissT – your defined benefit pension is probably worth quite a lot in a net worth calculation – use an annuity calculator to find out what lump sum would be needed to generate the same income.  Anyway that goes into the Base column of course since you can’t liquidate it – the Investments column is for assets that you can liquidate at some stage.

  2. It’s very important for people to think in these terms, and actually plan for concrete needs down the line.  Retirement and old age catches up to people quickly, so it’s best to know what you’ll need and work toward a specific goal.
    The one thing I think many people need to do in such projections is factor in some disruptions, as things don’t always go as planned in the best case.
     

    1. Thanks for dropping by @Squirrelers.  Disruptions are by their nature difficult to predict but I suggest that the best way to allow for them is to be fairly generous in estimating how much you need in the first place.  Smaller and/or temporary disruption can be accommodated by lines of credit for example.  The big problem would be a permanent disruption like a non-fatal stroke which could alter the whole picture but in essence means that you would need to divert spending from pleasure to need.  Let’s hope this will not occur.

  3. Just discovered your site after following a link from Sterling Effort, glad I did too as the spreadsheet is a bit of an eyeopener ;)
    But, after seeing how quickly £2.5M evaporated!
    It induced pangs of sympathy for Messrs Cameron & Clegg in their attempts to get the population to save anything meaningful to fund their old age, leading me to think that maybe an early demise is the most profitable course.
    I then got to reminising about Jenny Agutter and to a much lesser extent her running mate Michael York……….
    So cheers for that :)
     
     
     

    1. @Dave: Glad to have you around as well. Yeah, quite a few people have said that playing with the calculator is very illuminating. Please try to withdraw the sympathy for Cameron and Clegg – they are doing it for the neo-liberal reason to shrink the state (and kill the welfare state). But…we all have to look after our conditions in older age. Time demise (not early) – I used the calculator to tell me exactly how much we need so there is enough for a decent funeral at the end – children will make thir own way :).

  4. So, you ‘need’ $120k a year in retirement. And have to work your clacker off for the majority of your usable life to make $2.5M dollars (which is around $3.5M gross) so that you can retire. Whilst a standard ‘safe’ recommendation I’m used to hearing I’ve never been one to go with the crowd.

    I’d just like to let you know what I’ve done. I’m currently 34, semi-retired with assets of only $1.3M. I only need work part time casually and at a modest 5% growth PA am set to track $1M per decade. To me this makes alot of sense. Since semi retiring I’ve lived a little frugally (apart from the 3-month o/s holiday coming up) and found I need ALOT less than I WANTED for many years. In fact, had I kept going for the income I WANTED I would be working into my 50’s. And that’s even starting in my early 20’s like I did. Obviously quite difficult to achieve because I can tell you I saved and invested 80% of my full time income for the past 10 years.

    I’m happy with my current investments and will only continue to purchase more as equities become available whilst leaving this to compound. No need to work, only for odd cashflow and I’m happy

    Just my 2 cents worth

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