I am posting this question after reading this article on WSJ, where it says:

Just 42% of working-age Americans have even tried to calculate what they will need in retirement, according to the Employee Benefit Research Institute, a Washington, D.C.-based think tank.

So, how can I estimate such a thing? What are the various data points to keep in mind while calculating this?

For starters, I know I have these numbers with me with for now:
1. Current salary.
2. Current savings.
3. Current assets.

How do I account for inflation? Any others numbers to keep in mind? Taxes?

I understand some things like a recession, layoff or medical emergency cannot be predicted, but can this also be accounted in some way?


Common wisdom suggests a starting point of an 80% replacement rate to final income. It also suggests a 4% initial withdrawal rate from retirement assets leading to a goal of 20 times final income as the target nest egg.

Think of these numbers as a mid point of a bell curve. The retirement budget is personal. During your life were you saving for the kids' education? You won't have this expense in retirement. Same with the mortgage, if you pay it off before retiring. I've seen $100k budgets showing the couple was living on less than $40k, due to the combined mortgage, college saving, and retirement saving. Social security alone would cover their spending in retirement, my advice wasn't to save less/spend more, but to be aware and understand their retirement was actually funded to spend nearly twice their pre retirement spending. I've also seen the same $100k spent in full, a couple in their 50s with virtually no savings, and living on their entire income and then some.

The dilemma is this - first understanding your own current budget, then forecasting how it might change in its composition if not actual dollars. I have to say, Mhoran is right on, the goal isn't fixed, it's a moving target, and needs frequent revisiting.

Note - I wrote about social security replace ratio last year, the 20x or any other target goal should take SS into account unless you believe it won't be there at all.

Update - Retirement needs are best understood by looking at spending, not earnings. Financial writers typically focus on the replacement ratio, which of course is a comparison to earnings, not spending. In the end, one can either get wrapped up in the discussion of where to start, or simply start saving, aggressively, with an eye on the 80% rule of thumb, and as age 40 rolls around, start to migrate to a spending model.

Much of the process of doing the math along the way was discussed in How much money do I need to have saved up for retirement and my answer take a different spin there.

  • Good answer, but you didn't really mention inflation anywhere. Especially for younger people this might significantly affect their situation (both pre- and post-retirement since life expediencies are going up and retirement ages generally are not). – Jared Sep 4 '14 at 18:01
  • @Jared - you are right. See the question linked in the last line of my update above. A very similar one, where I believe I actually answered the question. – JTP - Apologise to Monica Sep 7 '14 at 15:59

The Employee Benefit Research Institute which you mentioned in your questions, has a set of tools at Choose to Save to help you plan for retirement. Many companies in the US on their employee benefits page have similar tools to help you plan for retirement.

Some tools will pick an inflation rate. others will let you pick a rate. These tools will factor in:

  • current situation: (age, savings, 401K/IRA balances, income.
  • expected retirement age and the transitional numbers for raises, inflation and return on investment.
  • future: expected lifetime, expected lifestyle needs, return on investment post retirement, inflation post retirement.

Tools tied to a specific employer, or a specific investment company, will let you see how the aggressiveness of your investment choices will impact the chances of you saving enough. The specific tools will let you pick a specific investment choice instead of a generic level of risk.

These tools can only give you probabilities, and have a wide margin of error. The key is to recalculate every few years or when you have a big life event (marriage, child born...) or when you get a promotion or change companies.


To calculate how much you need for retirement all you have to do is a simple Present Value of an Annuity calculation.

Take your annual expenses as the payout, use the interest rate you are getting from your retirement account minus the inflation rate (interest adjusted for inflation) and the amount of years you expect to need the payout (Or to put it bluntly: how long do you expect to live).

Your payout will be constant even through downfalls (as long as the interest rate holds) but if an unexpected expense arises after retirement you may need to have a buffer. Simply add the amount you would like to the amount needed for retirement.

To calculate how much you need to put away use the Future Value of Annuity calculation (The payment aspect from this site)


Several online tools can help you estimate how much money you will need to support your retirement days. However, each of these tools has certain limitations. From my experience, I can tell you that having a professional and knowledgeable advisor by your side is the best hedge against inflation, medical bills, currency devaluation and all those things that can potentially leave your retirement days vulnerable.

To start with, here are some quick moves you can make for a happy life after retirement:

  1. Start saving today [Never procrastinate in money matters]
  2. Hire an experienced financial planner
  3. Open an individual retirement account (IRA)
  4. Choose investments for your IRA

  5. Redistribute your portfolio as you get older

Even if you factor in all your current debts, incomes and major expenses you are likely to incur in the future, it is difficult to figure out how much you will need to live a comfortable life after retirement. Therefore, savings and right investments is the key.

  • 2
    Welcome to SE. The list is nice, but doesn't answer the question, as asked. As I see it, there's "How do I calculate how much I need after retirement" and there's "How do I best save for retirement". You answered the latter, more so. – JTP - Apologise to Monica Jan 9 '13 at 21:16

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