How much do I need to retire on?

Part 2 of a 3-part series

The first article to this series offered a tried and true methodology for figuring out how much more you need to retire on and how to fund for it.

The methodology came down to this:

(1) Estimate retirement income needs;

(2) Estimate retirement income resources;

(3) Subtract (2) from (1) to determine your Retirement Income Gap (RIG); and

(4) Estimate savings necessary to bridge the RIG.

We considered an example where current annual expenses were $72,000, but only 70 percent of that -- $50,400 was needed in retirement. With inflation at 3 percent and 10 years remaining until retirement, a $50,400 annual retirement income need today grows to $67,733 by retirement.

Assuming inflation continues at 3 percent post-retirement, that principal is liquidated, that investments earn 6 percent after taxes, and that retirement income is needed for 20 years, the total capital needed to fund the retirement income need is $1,045,480.

The next step in the methodology is to determine retirement income resources.

Retirement income resources

Retirement income derives from three sources: private savings; employer-sponsored programs; and government-sponsored programs

Tally up how much you have currently earmarked for retirement in savings accounts, certificates of deposit, life insurance cash values, annuities, money market funds, mutual funds, and individual stocks and bonds. How much have you contributed to ERAs and Roth IRAs?

Next, look at the annual benefit statement from your employer. The statement discloses your account balance in 401(k) and profit-sharing plans, and informs you about how much you can expect to receive from defined-benefit pension plans.

Also, search your files for the statement you received from the Social Security Administration. The government now sends statements telling you how much to expect at ages 62 and 65. Add your private savings and account balances from employer-sponsored plans together. Also, add up how much annual income you expect from pension plans and Social Security at retirement age.

The retirement income gap

Once you've calculated the capital value of your retirement income need and retirement income resources, it's a simple matter to determine the retirement income gap (RIG). The RIG is simply the difference between needs and resources.

In the example, retirement income needs were $1,045,480 compared to retirement income resources of $431,866. The RIG is the difference of $613,614.

Over $600,000 is a lot of ground to make up with only 10 years left to retirement. In the next article we'll look at funding strategies.

Sharon Stanley is a representative of The Prudential Insurance Co. of America in Cape Girardeau. (344-2603)