How to Calculate What You Need for Retirement

Are you wondering how to calculate what you need for retirement? If so, you’re about to discover HOW! Using my crazy good financial freedom calculator, you will be able to see where you currently stand and plot out your own path to becoming financially independent.

Create Financial Security and Avoid “Bag Lady Syndrome”

If you are like many women, the desire for financial security and independence is almost as powerful as your desire for water, air and love. My financial independence calculator is going to help you:

• sort out your money numbers,
• find the gaps and the opportunities,
• provide guidance on your path to financial security,
• and help allay your money fears and “bag lady syndrome” (definition: a visceral fear millions of women have about dying broke, homeless and alone).

Starting today, this MOTHER of all financial freedom calculators is going to do the heavy lifting for you. It’s designed to be ‘plug & play’ so that you can stop feeling intimidated by how all the pieces fit together.

I’ll be holding your hand through every single step (see below) so that you understand what each step means. I want you to feel confident about the numbers you enter and the results you see.

Getting Started with the Financial Freedom Calculator

Before you begin, I want to make it clear that it’s going to take a little time to pull all the pieces together for your very first calculation. DO NOT let this deter you. If your time is limited due to child care, elder care, health reasons, or a grueling work schedule, just break this up into baby steps over the next 3 to 5 days. (It’s amazing what can be accomplished in 15 to 30 minutes per day!)

You’ve got this!

Once you assemble all your beginning numbers and learn how to use this calculator, you will be amazed at how changing up a few things can get you on the path to financial freedom! You will be able to experiment, dream, and play with all sorts of scenarios for achieving financial independence.

Are you ready to get started? Then, go make yourself a nice pot of tea and keep reading, sister – because today is the day you learn HOW to calculate what you need for retirement and financial security.

Let’s Calculate Your Financial Security and Independence!

To get started, open up my Financial Independence and Retirement Calculator in a separate browser page. Next, BOOKMARK this page and the calculator so you can find them anytime. Soon, you will be able to quickly test any new financial independence scenario you can dream!

By the way, keep this page open so I can gently guide you through each of the steps. (see below)

The calculator will not store your data. So, don’t enter any numbers until you are ready to enter all of it.

Remember: Don’t worry or self-judge if you don’t currently have an answer. This is a learning journey toward financial self-empowerment.

Take all the time you need to pull together whatever is required to begin running your own calculations.  

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Age at end of current year:

If you are NOT in a permanent relationship or if you DO NOT combine your finances with a mate, use your own age.

If you are married or living with a permanent partner and DO combine your finances, use the age of the person retiring, first.

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Age you plan to retire:

If you are NOT in a permanent relationship or DO NOT combine your finances with a mate, use your own age.

If you are married or living with a permanent partner and DO combine your finances, use the age of the person retiring, first.

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Life expectancy:

You never really get to know exactly how long you will live. But, one thing you can know – or at least predict with a high degree of confidence – is if your money will outlive you.

Whether you want life to end with just enough money in the bank for quality nursing home care, a nice cremation and a memorial ceremony, or have life conclude with a generous estate to leave behind for your spouse, children, pets or a charity, you DO want there to be enough.

To keep thing consistent, enter the life expectancy age of the person retiring, first.

Important note: If your calculation is for you and a partner, and if you expect one partner to outlive the other by 3+ years, I highly encourage you to review the “Year End Balance” – located on the very last line of the report that the Financial Independence calculator creates for you.

Will it be enough for you to live on EASILY?

What if you live 10-20 years longer than your mate? Women’s average life expectancy is 81.2 years, and men’s is 76.4 years.

What if you or your mate requires extensive medical care or extended nursing home care? The costs are often very high. Can your savings sustain the elder care costs?

Will there be enough left over to care for you in advanced years? No woman I have ever met wants to be an “old bag lady”, to stand in line for food stamps, to be booted from her beloved home because she can’t afford the property taxes, or to be financially dependent on her children. So, this question is SUPER important!

Here are some resources to consider:

• 75 Must-Know Statistics About Long Term Care (2018)
• Cost of Nursing Home and Elder Care (2018) with Inflation Tool
• Nursing Home Costs (state by state)

You can start making these projections for yourself (and any partner in your life), using these Life Expectancy Calculators. It should take 5 minutes or less to do all four of the calculators featured.

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Desired annual retirement income:

The desired income number you enter should be what you would like to have in TODAY’S currency. The “inflation” function of this calculator (which you will read about in a moment) will automatically handle this for your personal timeline and conditions.

If you are already very clear on your current monthly costs and have a good understanding of your income needs/goals for your post-working years, pinpointing this number should be fairly straightforward.

However, if you are currently unclear on your monthly and annual budgets – including variable and one-time costs:

• auto repairs
• unexpected hospital bills
• replacing a roof
• property taxes
• large changes in health insurance premiums
• summer camp fees 

…and if you don’t have an idea when big debts will be paid off (like home mortgages, auto loans, education debt, etc.), coming up with the number will likely take some pre-work.

If so, don’t despair.

You can ballpark this number for right now just to get a very loose idea of things. Then, you can do a little pre-work over this next week and get clarity on your monthly and annual budget amounts. The more accurate your numbers are, the more useful your calculator results will be.

Once you are more clear on your ‘income need’ numbers, you won’t have to do this, again, the next time you want to run a desired retirement income projection.

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Every 10 years of retirement, reduce our (my) income need by this percentage:

Will you travel extensively in your first 10 years of financial independence or retirement?

Do you plan to buy a vacation home, an RV, or help your adult child purchase their first home in the first few years?

Will you pay off your mortgage DURING retirement, thus reducing your income need?

Will your health care costs go up or down in retirement?

Will your kids finish up with college and the associated costs?

What changes to your income need (up or down) do you anticipate once you stop full-time work?  If you currently desire to have $60,000 in annual retirement income, but you expect your costs will decrease $3000 each year, then you would enter “5” into the calculator.  ($3,000 / $60,000 = .05 which is  5%)

If you don’t anticipate any DECREASED income need, just leave this blank.

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Desired estate:

Do you want to leave something for your adult children or another family member? Or for a beloved pet? Or a charity or cause for which you feel great passion?

If not, leave it blank.

If you are unsure, leave it blank for now and see what results the calculator will produce for you.

If you are certain you’d like do this, go ahead and enter the amount in today’s dollars.

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Expected average annual rate of inflation:

Although it’s rarely discussed, this quiet, boring, little topic of inflation is actually the single greatest threat to your retirement. Stated simply: Inflation is a retirement–eater that will whittle away the value of your retirement funds, year after year.

This level of threat presents an increased risk for women (vs. men) since we tend to live so much longer.

Check out my article on the US Inflation Rate and Global Inflation Rate to help you better understand this subject and come up with your own inflation estimates.

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Current retirement savings:

If you’ve recently calculated your Net Worth (article and net worth calculator coming soon!), then you likely already have this number assembled.

Your retirement savings is the lump sum total of all cash and assets (that can be cashed out) that you’ve set aside to cover living costs in your financial independence or retirement years. If you are in the United States, this will usually consist of savings accounts such as the 401(k), 403(b), IRA, Roth IRA, employer funded accounts and matches, etc. Also, include an HSA (Health Savings Account) in this total if you have one and plan to hold it until you stop working. (Important Note: If you expect to receive a pension from an employer, this will be covered in a separate part of the calculator.)

(In the UK: PPP, Annuity plan, ISA) (In Canada: RRSP, TFSA) (In Australia: Superannuation account)

It could also be non-tax-advantaged accounts such as a regular brokerage account in which you hold stocks and bonds.

If you currently hold real estate that you plan to sell to fund your financial independence or retirement, then include the equity you expect to have after all mortgage repayments, capital gains taxes, repairs, and selling fees. (Important Note: If the real estate will be income-producing rental property that you will continue to hold in your financial independence or retirement years, do NOT include it here. The income stream will applied in the “Post-Retirement Income” section below.)

If you own a business, you would treat it, similarly, to real estate. If you plan to sell it before you stop working and live off the equity, then include it here. If you intend to keep running the business, then include the expected income stream in the ‘Post-Retirement Income’ section below.

If you don’t yet have retirement savings, enter 0. And, don’t stress. There are a million ways to structure your life so you can ultimately afford to live well in your later years. This is just a tool to see where you stand so you can make new choices.

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Current monthly contributions:

If you are single or keep your finances separate from your partner, enter just your own contributions here. If you combine finances with a partner, then total up the monthly amount and enter that.

If you work for an employer who matches some or all of your retirement plan contributions, be sure to include the monthly match in your total.

Also, if you currently have a high deductible health plan and are actively contributing to an HSA AND will NOT touch it until retirement, then include this in your monthly contribution total. (Note: HSA’s can play a powerful role in your financial independence strategy. However, you can only contribute to an HSA when you have a high deductible health plan.)

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Age to stop contributions:

This can be BEFORE retirement if you already have enough saved. A quick rule of thumb to see if you already have enough saved is to multiply your currently desired annual income by 25. For example: $60,000 x 25 = $1,500,000  which is the same as $1,500,000 x 4% annual withdrawal rate = $60,000 income per year. If you already have $1.5 million, you are golden.

If you don’t have that cool $1.5 million, don’t stress it. There are countless women who have completely changed their financial freedom numbers in less than 10 years through entrepreneurship and real estate (since traditional investing using paper assets tends to require a very long timeline). (I will start a series on this soon! So, stay tuned.)

Also, ALWAYS consider tax implications if you choose to stop contributing to tax-advantaged account. If stopping contributions early would automatically push you into a higher tax bracket (due to your high income) AND you expect to be in a lower tax bracket in your financial independence or retirement years, give this some extra thought.  Consider consulting your tax or financial advisor regarding this matter.

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Annual interest rate you expect to earn:

What return do you expect to earn on your retirement savings?

Are you a risk-averse person like one of my closest friends who prefers to invest a large percentage of her family’s assets in CD’s and corporate bonds earning 3-5%, plus some real estate?

Are you a moderate risk-taker with a traditional asset allocation model of 70% stocks/30% bonds who expects an average of 7% annually?

Or, do you judiciously employ higher-risk, higher-potential-return strategies around alternative investments, startups, peer-to-peer lending, commercial real estate, and higher stock holdings that net you 10% annually?

This rate of return you expect to earn on your retirement or financial independence assets is unique to you. If you don’t currently have an idea of what this number would be for you, you could start by logging into all your financial accounts and locating your annual returns. Or, working with your bookkeeper or accountant to determine the gains and returns on any businesses or investment properties you hold.

If you just want to run a rough calculation to see how your rate of annual return can affect your financial security, then use the numbers in the examples I gave above.

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Combined Federal & State Tax Rate during retirement:

“…in this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin

Even in your financial independence or retirement years, you still get to pay taxes. Wahoo! Not! – So, it’s important that you calculate what your taxes might be at the time of retirement or financial independence.

For many women (and men), the mere suggestion of figuring out your tax rate either makes you instantly tense up and need a massage, or it sounds as exciting as listening to your great aunt Bea talk about how her friend’s neighbor has terrible bunions on his feet.

Whether this subject truly excites you, or not, I hope you will invest a little time to understand how to do this for yourself – at least at a basic level. It’s extremely useful knowledge to have.  (Your accountant and/or financial advisor can help you do a more in-depth estimate of your taxes at retirement or financial independence time.)

There are several ways of looking at the tax rate. For the purposes of this financial independence/retirement calculator, the tax rate you want to enter is your “average tax rate”. 

To give you an idea of what this number is, the “average tax rate” is basically your total taxes paid divided by your total gross income from all sources (all salaries, tips, net profits from a business, dividends, bonuses, net rental income, etc.)

Let’s practice using your current income and taxes!

If you have your most recent tax return handy, you can calculate your current “average tax rate” for yourself in about 5 minutes, or less. Here’s how:

1. Determine your total gross income from all sources (including your partner’s, if you filed jointly).
2. Determine the total amount of federal tax you paid. If you are taxed in the United States, this would be Line 63 on IRS Form 1040.
3. Determine how much state tax you paid. You will have to find this number on your state income tax return.  If you live in a no-income tax state, you get to use a big, juicy “0”.
4. Add your ‘federal tax paid’ to your ‘state tax paid’ (if any) to get your ‘total taxes paid’.
5. Now divide your ‘total taxes paid’ by your ‘total gross income’.  The result is your ‘average tax rate’.

That was fairly easy, right?

For your retirement average tax rate, your income scenario is going to be somewhat different. Calculating your average tax rate is going to be a bit more complex because you are likely to no longer have access to the tax shelters like the 401(k), FSA, child tax credits, insurance premiums through your employer, etc. You will also shift to new income streams from dividends, social security, rentals, and retirement savings – each of which have different tax treatments that vary by state.

Your taxes could go up quite bit or drop way down depending on how you have things structured and where you live. Some folks end up with a teeny, tiny tax bill with smart tax planning. Others pay 25%. This is why you will likely want to get help from your tax accountant and/or financial advisor.

However, you can roughly BALLPARK things for now. It won’t be perfect and it’s not a guarantee. It’s just a starting place to help with your planning process.

Here’s how to do it:

1. List out ALL your expected income streams in retirement or at your financial independence date. For example:
   • Social security
   • Pension
   • Rental income
   • Dividend income
   • Royalties
   • Required minimum distributions (RMD) from your Retirement accounts
2. List out the annual income you expect to receive from each of the income streams at the time of retirement or financial independence (but in TODAY’s dollars).
   • If a deduction applies to the income stream (Only 85% of Social Security is taxed for most people, 80% of rental income is taxed for most people. In these two cases, multiply the applicable annual income stream by .85 or .80, respectively, to determine what part of the income will be used in your tax calculations.)
   • Total up all the income streams.
3. Subtract any “Standard Deductions” from the total income streams (calculated in step #2). If you are in the United States, you can use the IRS Tax Rates and Deductions Tables to determine your deduction based on your current filing method. This will give you your Taxable Income.
4. Now calculate your taxes.  If you are in the United States, you can use the IRS Tax Rates and Deductions Tables to estimate the taxes you’d pay in each of the tax brackets. Don’t forget to add in your state taxes, as well (if they apply). (States tax retirement income, differently. Many states do not tax Social Security or pension income.)Calculate the total tax you would pay.
5. Divide your estimated total taxes (step #4) by your total estimated income (step #2). (You can add back in the 15% deduction on Social Security and the 20% deduction on rental income, if you wish.) There you have it!  Your estimated retirement or financial independence tax rate!

Want a little more on this? I thought this on How to Estimate Taxes in Retirement was helpful.

Also,I strongly recommend you learn the difference between your Marginal vs. Average Tax rates, this video makes it clear.

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One-Time Benefits:

One-time benefits are single cash inflows that you expect to receive at various points in your financial independence years or in retirement. These cash infusions can be a wide variety of things, such as:

• A home or rental property you plan sell to access the equity,
• An inheritance from a family member,
• Proceeds from a life insurance policy,
• A trust fund you will gain access to,
• A retirement payout.

Enter the amount you expect to receive, plus the age you estimate you will be when you receive it. Only include benefits you are very confident you will receive.

 

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Post-Retirement Income:

Do you remember the income streams you assembled a couple steps ago? This is where some of your estimated post-retirement income streams get entered.

1. Rental income stream (just make sure the equity in any rental properties is NOT included in your ‘current retirement savings’ figure, or you will be double-counting)
2. Pension income (whatever you estimate you will receive at retirement)
3. Social security income (whatever you estimate you will receive at retirement) (If you are a US citizen with access to Social Security, here is the current solvency of the program. You may wish to adjust your income projections, accordingly. Some people don’t include the SS income stream at all, but I 100% believe we will each get something in return for our years of contributing.)
4. Dividend income stream (just make sure the assets that spin off this income are NOT included in your ‘current retirement savings’ figure, or you will be double-counting)
5. Royalties from books, music, licensing of your creations, etc.
6. Trust fund distributions (if it’s not already accounted for in the ‘One-Time Benefits’ section)
7. Part-time job income
8. Business income (that you will keep running)
9. Any other passive on semi-passive income stream

What makes this section especially cool is:

1. You can play with hypothetical income scenarios in your financial independence or retirement years. It’s amazing what just $500-$1000/mo. extra can do for your retirement or financial independence years.
2. You get to set the ages for when these income streams start and stop.
3. You can set the rate at which these income streams increase.  For example, I tend to set Social Security at a 1.5% annual increase starting “Now”. If you anticipate at $5000 per month income stream after you stop officially working, you can set the annual increases to begin at the time you stop working.  Or, if NO increase will ever apply to the income stream, you can just leave the field blank.

It’s this section that makes me love this calculator SOOOOOO very much! If owning rental properties, owning a business, writing books, or working part-time feel like viable income streams for you and your future, you are going to LOVE this section of the calculator!

ENJOY!

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Got Comments or Questions on this article or the calculator! Leave them in the section below and I’ll do my best to reply!