How to Know if You Are Saving Enough for Retirement

by Neal Frankle, CFP ®

Do you know if you are saving enough for retirement? Most people don’t have a clue. And when they ask me, “How much money do I need to retire,” they don’t like my answer.

According to an ING survey, a third of the people over 55 think they need to save $250,000 in order to retire. Another third thinks they need $1 million. Most of the rest don’t know. By the time you finish reading this and doing the exercises, the good news is, you’ll know.

Let’s get started:

1. Get a personal budget plan by knowing what you spend.

Notice I didn’t say that you should monitor your expenses. You need to know what you spend and there’s a huge difference between the two.

When I ask folks to tell me how much they spend, they often list their expenses. Unfortunately, most people spend about 30% more than they think they do.

Why? Because they spend money on things that aren’t included in their monthly expense list. I’ve written about this issue extensively, and I will tell you that unless and until you are willing to track your spending, you will have to depend on your luck in order to save for retirement because your luck will be the only thing you’ll have going for you.

I use You Need A Budget to track my expenses. Consider using that software or something similar.

2. Don’t make bad assumptions.

You know what happens when you assume, don’t you? You make an ASS out of U and ME!

Specifically, don’t kid yourself into thinking your expenses will drop when you retire. They won’t. I say this for three reasons:

a. When you retire, you’ll have more free time to spend money…so you will.

If you think about it, you probably spend more money on the weekends than during the week. Well…when you are retired, every day is a Saturday. You’ll have the time you always wanted to go bowling, travel the seven seas, take up skydiving and more. It costs money, baby. It all costs.

b. Inflation isn’t going to stop working just because you do.

Even if inflation doesn’t get out of control because of unfettered government spending, you should figure that inflation is going to continue. Let me illustrate the danger of inflation.

If you spent $50,000 a year in 1980 to get by, it would cost you $128,000 to pay for the same standard of living today. That’s an increase of 250% in 30 years. If you are 60 years old today, it probably makes sense to count on living another 30 years, so you do the math. You’re going to need more income during retirement than you think.

c. Medical expenses.

Even after you qualify for Medicare at 65, you still have premiums, deductibles, co-pays and uncovered items such as glasses and dental.

d. You will probably live longer than you think you will.

Many people make the mistake of looking at actuary tables and assuming they’re only going to live into their seventies or eighties. The reality is that the longer you live, the longer you are likely to live. So a healthy 53-year-old man can expect to have a longer life than a newborn who hasn’t overcome childhood, diseases, etc. What I’m trying to say is that you can’t rely on actuary tables. If other people depend on you, look into term life regardless of your age.

3. Be realistic about your retirement income.

If you’re like me, you can’t count on collecting from a pension plan or an annuity payout. My retirement income is going to be generated from investments and Social Security. With that in mind, let’s take a stab at estimating both.

Social Security benefits and Social Security spousal benefits are pretty easy to estimate. You can get simply ask Social Security to send you a worksheet and you will have your number.

If you collect rent from real estate, adjust that rent for inflation. Not too hard either.

Estimating income from investments is another story.

If you own equities and mutual funds, you’ll have no choice but to make assumptions about what they will grow to be. There are a number of calculators you can find online that will tell you what your nest egg will grow to given an assumed growth rate and assumed contribution rate.

For argument’s sake, let’s say that you currently spend $8,000 a month. Let’s also say that when you retire (15 years from now), you’re going to need $10,000 a month to keep pace with inflation. Some of your expenses will drop off (like your mortgage, hopefully) but others will increase – like health care.

Let’s also assume your combined Social Security income will be $4,000 a month.

So in this case, you are $6,000 a month short.

Remember a few paragraphs ago when you estimated what your nest egg would be when you retire? We’ll need to use that number now.

I know I asked you not to assume earlier…but now I see we are going to have to make some assumptions in order to illustrate the point.

If we assume you can withdraw 4% of your nest egg every year to create the income you need, let’s determine how much more you need to save.

Assuming your nest egg will be $900,000 by the time you retire, that will generate $36,000 a year at 4% – or $3,000 a month. That means you are still $3,000 a month short. So this indicates you aren’t saving enough money.

How much more must you save for your retirement?

Well…you need an additional $3,000 a month – or $36,000 annually. You’ll need to generate that income in about 15 years, so you’ll need an additional $900,000 by the time you retire.

Using the calculators I mentioned above, you calculate that you need to save an additional $33,000 a year (approximately). Rather than look around for another calculator or use my fancy one in the office, I just plugged numbers in until I reached my goal of $900,000 using 6% as a growth rate.

Now of course for some of us, saving an additional $33,000 is an impossible task.

There are a number of solutions for this retirement problem but for this post, let’s set that problem aside.

You see, I think the reason more people don’t go through this exercise is because they are pretty certain the additional savings they’ll need is quite beyond their ability. As a result, they act like ostriches and stick their heads in the sand.


Look – for the time being, don’t worry about how you’re going to get there…all I want you to do is make sure you know what your number is.

I will guarantee that if you’re not willing to calculate the number, you’ll never be able to devise a good plan to reach your goal – or modify your goal so that you come up with one you actually can reach.

Have you calculated what you need to save for your retirement? Were you surprised with the result?



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