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How do I gauge how much money I need to retire?


Your starting point is your current salary, which will provide a rough idea of how much it will cost to live each year in the way you do now. Then you’ll need to consider several factors that are hard to put figures on and several others that are almost impossible to assess. One of the least difficult ones is how long you’re planning to work until retirement. If I understand you correctly and your answer is “as little time as possible,” then you still need to estimate how long you will live once you retire. Good luck with that.

Any assessment of how much you’ll need to spend each year will be based on the current costs of things, so you’ll also have to guess the rate of inflation between now and retirement and then for the rest of your life after that, as well as potential returns on your pension assets. Other factors that come into play are your health, whether you own a home and, if so, whether you expect to have paid it off by the time you stop working.

A way to reduce some of these variables is to buy an annuity, in which you pay a lump sum to an insurance company in exchange for regular payments for life. The insurer will factor in its best guesses of your life expectancy, as well as inflation rates and anticipated investment returns to determine the amount of the payments. But because the last two unknowns, if not all three, are variable, you still won’t know what the payments will be until the time comes to buy the annuity. You can check current annuity rates and get a rough idea, but that’s all it will be, so how much you need to save will remain a mystery. If you want to play around with these and other variables, there are many websites with retirement calculators. Try the one at the independent research site Whichever way the numbers crunch when you plug them in, the short answer is that you’ll need to save as much as possible before you retire, and the sooner you start, the better.

-Conrad de Aenlle