Early Retirement Blog

How much savings do you need for retirement?  Traditional retirement planning says that you need to be able to spend, the equivalent of 70%-80% of your current salary, every year in retirement.  Is that correct? No, it is not, it is a complete guess.  And this guess, causes most people to save more than is necessary for their retirement, and work many years longer.  So, how much savings do you actually need for retirement?  And, how do you calculate how much savings you will need for retirement?

How much savings you need for retirement, is not determined by your salary, the amount of savings you need for retirement is determined by how much you spend in retirement.  It’s really that simple.  And, since you determine how much you will spend in retirement, you determine how much savings you will need for retirement.  You have control over your retirement.

So how do you calculate how much savings you need for retirement?  The calculation, is pretty simple as well, so simple a 5th grader could calculate your retirement savings needs.  Here is the formula:

Retirement = Spending / SWP

Retirement is your Net Worth.  Spending is your Retirement Budget.  And SWP is your Safe Withdrawal Percentage.  The percentage you can safely withdraw from your savings each year without ever running out of money.  The SWP varies between 3% for a 40 year old, to a maximum of 4.75% for a 65 year old person.   As an example on how to use the Green Retirement Formula, let’s assume you are a 55 year old person, with a net worth of $500,000. Your SWP will be 4%.

$500,000 = Spending /4%

Spending =  $20,000 per year

$20,000 per year is the amount that he can safely spend each year without worrying about running out of money.  But what if you calculated that you will need to be able to spend $3,000 per month? How much savings will you need to support a $3,000 monthly retirement budget?

Retirement = $3,000 / 4%

Retirement = $900,000

$900,000 is the net worth you will need to be able to support a $3,000 monthly retirement budget.  Now, here is where you get control of your retirement, you can adjust your retirement savings needs by adjusting your retirement budget.  If you decide that you don’t want to continue working until you are able to save an additional $400,000, and you find a way to adjust your retirement budget to $2,500, now you need a $750,000 net worth to retire.  You control your retirement budget, and therefore, you control your retirement savings needs.

If you earn $80,000 per year, traditional retirement planning calculates that you will need $1,600,000 to retire, that is almost a million dollar difference between Green and traditional!

To find out how much savings you need for retirement, and to compare Green Retirement vs. Traditional Retirement, visit the Green Retirement website and try the free retirement calculator on the home page.