What have you done to calculate your retirement pot?

I gave a seminar this week for IPWS (International Professional Women’s Society). I was impressed by the level of questions I was asked and the diligence with which participants carried out exercise and discussions around planning towards financial independence.

Given the feedback I received, I thought I’d share a quick tip around one the question:

How do I calculate the amount I’ll need in retirement?

There are in factors to take into account. One is inflation. The other factor is that we simply don’t know how long we will live. If medical science continues to evolve at its current rapid rate, we are likely to live longer and healthier lives. This creates a wonderful opportunity to enjoy our latter years, and also a challenge to fund these same years.

There are in fact several ways to answer this question. The quickest and broadest guideline is as follows:

Imagine you’re retired and all outstanding debts are paid off. What income per month will you be happy with (in today’s terms)? [If you’re unsure of this number, take 75% of your current income.]

Multiply by 12 = your annual income in retirement.

Assuming inflation at 3%, for every 20 years remaining until your retirement, double the income amount. (This gives an approximate inflation factor. For more accurate data multiply the income by 1.03 and compound this over 20 years.)

To calculate the amount you’ll need to sustain your income for life: multiply by 20.

Here’s an example:

Age 45 and retiring in 20 years at 65 with a desired income of 5,000 per month 

5,000 x12 = 60,000 per year

20 years until retirement: 60,000 x 2 = 120,000

Amount needed: 120,000 x 20 = 2,400,000

There are a number of other ways of strategising for retirement but this is a good starting point.

How do you feel about the final number?