Joyful retirement is an admirable goal. How much is money needed to retire with joy and dignity is relative. One size does not fit all. Many companies offer simple retirement calculators. However, these businesses have a definite conflict of interest. Most of us simply want to know how much we need without all of the sales pitch nonsense or fear tactics.
Are you interested in accurately calculating your retirement number? Would you like to retire joyfully? If yes, then please continue reading.
Joyful Retirement Step #1 (Determine How Much)
How much money is needed for retirement? Many assume that 80% of an existing salary will be adequate. Why? Is there anything magical about that calculation?
Certainly, some families will spend less during their retirement years. Others might spend more.
My future deserves more than an arbitrary number. This article provides step-by-step instructions for the Annuity Method of determining retirement needs.
Once a person retires, there are a couple of bills that expire. The first one is Social Security and Medicare taxes. Social Security tax is 6.2% and Medicare is 1.45% (for now). The total FICA rate is currently 7.65%. That figure can now be removed from your existing income.
Gross wages are 100%. It’s perfectly fine to reduce it by 7.65%. Your revised retirement salary is now 92.35% of your current wage.
Another cash outflow that ceases is retirement contributions. Imagine contributing 10% of your wages to a company-sponsored 401(k) plan. That stops upon retirement. You can now reduce your retirement wage by another 10% to 82.35%
100% (current wage) — 7.65% (FICA) — 10% (4o1k) = 82.35%
Let’s keep the math simple and say gross wages are $100,000. Retirement wage will be $82,350.
This can be reduced further if you’re mortgage-free and don’t intend to move.
Joyful Retirement Step #2 (Revise With SSI)
We enter this retirement step with a gross wage of $82,350.
It’s time to reduce that number even further. Paying into social security was painful but the goal was to get something in return. Social Security benefits, in this estimate, are $2,750 per month or $33,000 per year.
$82,350 — $33,000 = $49,350.
$49,350 is now the revised annual retirement wage.
Click here to see how much your Social Security benefits will be upon retirement.
This figure can be reduced again if there is an expected pension payment.
Joyful Retirement Step #3 (The Bad News, Inflation)
A dollar today is worth a lot less in the future. Allow me to introduce you to the silent retirement zapper — inflation.
How much will the value of $49,350 be in the future?
How long before retirement? What is the rate of inflation?
The current rate of inflation is available here. The rate as of today is 3.1% so that’s what we will use.
Our fictional family has twenty years before retirement. We need to calculate the future value (FV) of $49,350.
The simplest way to do this is in Google Sheets (or Excel but Sheets is free).
Click on any cell in Google Sheets. Then type =FV(
Type the equals sign. Then type FV. Lastly, type a left parenthesis. A Future Value formula will then appear in the spreadsheet.
We will then follow the directions in the formula.
Rate = .031
Number of Periods = 20
Payment Amount = 0 (nothing is being paid)
PV=49,350
End or Beginning = 0
The formula will look like this: =FV(0.031, 20, 0, 49350, 0)
After each figure, enter a comma. Close the parentheses at the end of the formula.
The future value of $49,350 is $90,878.
Inflation is a destructive force. It’s not greedy capitalists arbitrarily raising prices. Inflation is a state-sponsored (government) tax on every person. Good thing we have the joy of the Lord!
Joyful Retirement Step #4 (Make Sure Your Money Lasts)
Only Enoch and Elijah made it out of this life without dying. When planning for retirement it’s important to understand that we all will die, eventually. None of us know when we will die.
Life expectancy is rising. Many people are living well into their eighties and some even longer.
We want to ensure that we have enough money to live joyfully and with dignity in our later years.
In our example, we will use a life expectancy of eighty-five years old. Our fictional character will have retired at age sixty-seven. Retirement income needs to last eighteen years.
Here are our variables for this equation:
Future Value
The future value will be zero (fv=0). That means that we will die with $0 in the bank. Why $0? This is our minimum need. If we want to leave some money behind we simply change the number from $0 to something else. For now, we will use $0.
fv=0
PMT
For payment, we will enter the inflation-adjusted amount from the previous step. That amount is $90,878. In the formula, that figure will be entered as a negative number.
PMT = -$90,878.
Rate
The rate is our expected return on our investments. This number is an estimate at best. Plus, we will need to calculate for inflation as it continues to wreak havoc on the financial system.
Dave Ramsey, for many years, taught that a 12% return was possible. He received pushback on that number.
Often investment firms use a low number which can cause investment frustration.
The S&P 500 has returned 10.26%, on average, from 1957 – 2023 (Investopedia). I’m comfortable using that figure. We will, however, round down to 10% flat.
Inflation is currently 3.1%.
Here’s the funky figure for Google Sheets: =(1+.09)/(1+.031)-1. Press enter.
By using this formula you can always update these numbers with revised inflation or stock market returns.
Rate = 0.067
Number of Periods (NPER)
We need the money to last for eighteen years. That’s our educated guess of when we intend to permanently meet Jesus.
NPER = 18
Type or Beginning or Ending of Period
In this scenario, the person is retiring at sixty-seven. They are not working the entire year and retiring the day before turning sixty-eight.
Beginning of Period = 1
| Rate | 0.067 |
| Number of Periods | 18 |
| Payment Amount | –90,878 |
| Future Value | 0 |
| End or Beginning | 1 |
Calculate for Present Value (PV)
=pv(0.067, 18, -90,878, 0, 1)
Present Value = $996,876
This person needs to have $996,876 in retirement funds when on day one of their retirement adventure.
Joyful Retirement — Step #5 Monthly Contribution
Our friends needs nearly a million bucks to retire. How can we ensure that this happens systematically? Now we must calculate for payment (PMT). How much does this person need to contribute to their retirement fund? We will calculate a monthly payment so it fits into our budget.
Here is the formula for PMT in Google Sheets: =PMT(rate, number of periods, present value, future value, end or beginning)
Rate
We’re calculating for a monthly contribution. To do that we are going to calculate a monthly rate.
The annual rate, discounted for inflation, is 0.067. To get a monthly rate that figure is divided by twelve.
=0.067/12
Monthly Rate = 0.00558
Number of Periods
We’ve previously determined that there are twenty years before retirement. We’re calculating a monthly contribution so our number of periods needs to be consistent.
There are 240 months in twenty years.
Number of Periods = 240
Present Value
Our fictional family contributed $2,500 per year for the past twenty years. The current present value of their retirement fund is $124,064.
PV = $124,064 and is entered as a negative number.
Future Value
We’ve determined a future need for $996,876
FV= 996,876
| Rate | 0.00558 |
| Number of Periods | 240 |
| Present Value | –124,064 |
| Future Value | 996,876 |
| End or Beginning | 0 |
Joyful Retirement Step #6 Monthly Contribution
pmt=(0.00558, 240, -124064, 996,876,0)
PMT = $1,045.99
Our friends need to contribute $1,045.99 monthly to meet their retirement goals.
Is that doable? They’ve been contributing a little more than $200 per month.
Annual contributions would be $12,552. The family earns $100,000 per year. Contribution as a percentage of income would be around 12.5%
Dave Ramsey recommends families contribute 15% of their income towards retirement. He also disregards any company match. His approach is ultra-conservative. It closes potential shortfall gaps. However, it also opens up families to potentially overfunding their retirement accounts.
Is that a bad thing? It could be.
Every dollar contributed to a retirement account cannot be immediately given to Gospel causes. There is an opportunity cost involved.
Company Matches
Should company matches be considered when determining contribution amounts? I suggest that they should be.
Imagine this person’s employer provides a 100% match for up to 5% of their contributions. In other words, if the person contributes $5,000 per year (5%) the employer matches dollar for dollar.
Now the family has $10,000 in total contributions. Does it matter where it originated? No, not particularly.
The employee would need to set their contribution level at 8% instead of 12.5%. This provides another $4,500 for other opportunities per year and another $7,000 compared to the Ramsey plan.
What If I Don’t Have A Company 401(k)?
IRAs are a great alternative for those who do not have a company-sponsored plan. They have limitations and require more discipline but are a great way to build wealth.
Use the same formulas to determine how much needs to be contributed each month.
Retirement Needs Recalibration
Having a retirement calculator established in Google Sheets is beneficial. Once it’s set up, changing variables is simple.
It’s important to regularly recalibrate your retirement needs to ensure accuracy. Revisit this process once per year when conducting your annual personal financial review.
Full Disclosure: This is the simplest method (the annuity method) to determine retirement needs. There are a handful of other methods available that are a bit more complex. The annuity method will get you on the right track and is a great place to start.
**Every financial situation is unique. Before making changes to your financial plan, consult with a competent professional who is aware of your specific situation.**
Tim manages a $ billion + loan portfolio. He loves to write and teach about biblical stewardship. He has authored three stewardship books including The Profit Dare. His 4th book, Savvy Stewardship will be released in April 2024. He hosts The Profit Dare and Sola Melodica YouTube Channels.
He has an MBA from Cornerstone University and a Certificate in Behavioral Finance from Duke University.
Tim is a former church planter, youth pastor, and short-term missionary.
