Retiring with dignity is a great goal. How much money is needed to retire with dignity? Is there an easy-to-follow formula to get a ballpark figure? Where does faith come into the equation? Doesn’t God make a way for His kids during retirement?
Retiring with dignity is possible for the majority of American families. The amount needed for retirement can be simply calculated. With a few documents and about five minutes, one can calculate how much money is needed to retire with dignity.
Step #1 — Determine Your Income Replacement Need
Our first step to retiring with dignity is to determine how much is needed.
Many people aim to replace about 80% of their current income for retirement. Is that an arbitrary number or is there something behind it?
The majority of wage earners will want to replace all of the current wages — 100%. Some expenses will continue through retirement. Other expenses will increase during retirement. Other deductions will be non-existent during retirement.
Retirement Contributions
Contributions to retirement accounts cease during retirement. Our retirement account is what it is at this point. Did we contribute enough? Hopefully. For the sake of this article, we’re going to believe that we did and that we’re no longer contributing.
Let’s keep the math simple. Our fictional person, Rebecca, earns $100,000 per year.
Rebecca is contributing ten percent (10%) of their gross pay into a company-sponsored 401(k) plan. She is also contributing five percent (5%) to a Roth IRA. The total retirement contributions are fifteen percent (15%) per month or $15,000.
Rebecca is sixty years old and intends to retire at full retirement age (according to social security) of sixty-seven.
FICA
Who is FICA?
Payroll taxes and FICA taxes are the same. Most of us, including Rachel Green, refer to them as FICA. FICA is comprised of two things: Medicare and Social Security.
The Medicare rate is 1.45% and the Social Security Rate is 6.2% — or a total of 7.65%. Your employer pays the same thing.
At retirement, employees stop paying payroll taxes (FICA).
Recall that Rebecca earns $100,000. She pays 7.65% in payroll taxes (FICA) or $7,650. Additionally, she contributes $15,000 to her retirement accounts.
Here’s a link to an article from Nerdwallet on FICA.
Neither FICA nor retirement contributions need to be paid during retirement.
Social Security Wages
Rebecca pushed her retirement to sixty-seven to get a larger payout from social security. Her annual social security payments will equal $27,000. Her estimated social security wages are removed from her current salary as well.
Here’s the breakdown for Rebecca.
| Rebecca’s Retirement Needs Per Year | Dollars |
| Current Salary | $100,000 |
| Retirement Fund Contributions (-) | ($15,000) |
| FICA (-) | ($7,650) |
| Social Security Income Estimate (-) | ($27,000) |
| Annual Retirement Need Today | $50,350 |
Rebecca needs to recreate an estimated retirement salary of $50,350 per year to live in the way that she is currently living.
Step #2 — What About Inflation
Inflation is the silent financial killer. When discussing future financial needs we must take inflation into account.
Here are a few items and how their prices have changed over the past twenty years.
| Item | 2000 | 2020 |
| Average New Car | $21,850 | $38,000 |
| Median Price of a Home | $119,600 | $329,000 |
| Pound of Hamburger | $2.01 | $4.63 |
| Big Mac | $2.39 | $4.95 |
Obviously, inflation will impact future purchasing power.
Rebecca needs to recreate $50,350 but what does that equate to in future value?
Inflation is crazy right now. Historically, it’s averaged 2.0% — 3.5% annually.
For our calculation, we will use 3.5%.
The $50,350 in today’s dollars has a future value of $64,059 in seven years — quite the difference.
This can be calculated in Excel or Google Sheets using the Future Value function.
Here are the variables: PV = $50,350; PMT = $0; Rate is 3.5%; and NPER = 7.
Our needed salary currently equals $50,350. Inflation is equal to 3.5%. Rebecca is currently sixty and she’s retiring at sixty-seven — or seven years.
Step #3 — Determine Future Needs
Rebecca is relatively healthy and estimates that she will live until she is eighty-five years old. Her money needs to last for eighteen years (85 years old — 67 years old = 18 years).
She needs to pull out $64,059 per year for eighteen years. Our investments will be a bit more conservative during our golden years. We will use a return of 5.5% and keep inflation at 3.5%.
We are calculating how much we need in our large briefcase full of money. This amount needs to last until we go to heaven.
Rebecca is going to need $984,783 to make it through retirement.
This retiring with dignity step can also be done in Excel or Google Sheets using the Present Value function.
In the function, the future value equals zero. Payment (PMT) is the inflated number we calculated previously or $64,059. This number must be entered as a negative because it represents a cash outflow. The rate is discounted for inflation but also includes our expected return on the investment of 5.5%. The rate, for the function, equals 0.01923 or 1.923%. Rebecca expects to live eighteen years so NPER equals eighteen (18).
This calculation gets us through anticipated retirement, only. There are other calculations that would provide additional cushion.
Rebecca needs a briefcase full of money which equals $984,783.
How will she get it?
Step #4 How To Get It
Rebecca has been investing in her retirement accounts for decades. She began investing when she was twenty-two and has built up a nest egg of $500,000. How can she generate nearly another half of a million dollars before she retires?
Compound interest!
Is it even possible?
Let’s find out.
The final step to ensure that she is retiring with dignity is to determine how to do it.
She has seven years to do it, which is also eighty-four months. NPER is eighty-four (84).
Her anticipated return is 9%. She would like to know how much she needs to invest monthly. To get a monthly rate we divide 9% by 12 (.09/12). The rate will be 0.0075.
She has $500,000 in her retirement account. The present value (PV) is $500,000 (entered as a negative).
She needs $984,783 when she turns sixty-seven and retires. The future value is $984,783.
We are calculating for payment. What is the monthly payment (PMT) that is needed to get from $750,000 to $984,783?
Drum roll, please.
Rebecca needs to invest $413.84 per month, every month until she retires to reach her goal.
She’s in great shape! That’s just shy of five percent (5%) of her gross pay. She’s investing fifteen percent (15%) now.
Talking with a financial advisor has opened her eyes.
She’s ready to retire knowing that she will have more than enough to last her through retirement.
What About Faith?
We can often lay out fantastic plans for our future. The difficult truth is that only God knows what’s really going to happen. That should not stop us from planning or making proper provisions.
Faith is active. Without faith, it’s impossible to please God.
Trusting God is not a license to drift. The faith hall of fame is full of people who have overcome many obstacles. Here’s an article that I wrote about seeing the invisible and doing the impossible through faith.
We live by faith. Part of that is being a good steward of God’s resources.
Rebecca is in solid shape.
How about you?
Blessings!
**Disclaimer**
Personal financial planning can be tricky. As such, obtaining the advice of a professional who is aware of your specific situations and circumstances is encouraged.