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Retirement Planning by the Decade โ Chapter 4
Know Your Retirement Numbers
Replace uncertainty with four clear, measurable targets. Work through the Six-Step Method to find your retirement savings goal, see where you stand, and calculate your monthly savings goal.
๐ Chapter 4 Companion
4 Retirement Numbers
For illustration only
Quickโก
Quick Calculation โ Simplified Retirement Estimate
A fast starting point in today's dollars. Use the Six-Step Method for a complete calculation that accounts for inflation and projected savings growth.
Before taxes and deductions
$
Estimated income from other sources
$
Total across all accounts today
$
Formula
Annual spending estimate = Gross income ร 0.8 โ Subtract other income โ ร 25 = Savings goal
About the 80% rule: Many planning rules of thumb use 70โ80% of pre-retirement income as a quick spending estimate. This is a starting point, not a guarantee โ actual needs vary by household. The Six-Step Method lets you build a personalized estimate from your real expenses.
1
Spending Estimate
2
Inflation Adjust
3
Other Income
4
Savings Goal
5
Projected Savings
6
Monthly Goal
โ
Your Numbers
Step1
Annual Retirement Spending Estimate
Retirement Number 1 โ Estimate what your life will cost in retirement, in today's dollars. Start with what you spend now and adjust for what will change.
Personalized Method: Build from your real life. Start with current annual spending, subtract costs that will likely disappear, and add new costs that will appear or increase in retirement.
$
Mortgage payoff, commuting, work clothes, etc.
$
โ
Healthcare cushion, travel, hobbies, family support
$
Formula โ Step 1
Annual retirement spending estimate = Current spending โ Spending that goes away + New retirement spending
Healthcare Note: Medicare covers many services, but beneficiaries still pay premiums, deductibles, and cost sharing. Use a planning cushion for healthcare and revisit periodically. See Chapter 10 for details.
Step2
Adjust for Inflation
Inflation is one of the most overlooked factors in retirement planning. This step converts your spending estimate into future buying power.
How many years until you plan to retire?
Formula โ Step 2
Inflation-adjusted spending = Spending estimate (today's dollars) ร (1 + inflation rate) ^ years
About inflation: These calculations use a 2.5% planning assumption โ the book's default โ but inflation can vary. Review your numbers regularly and update assumptions as conditions change.
Step3
Annual Retirement Income From Other Sources
Income from Social Security, pensions, and other predictable sources reduces how much your savings must fund each year.
Use your SSA statement estimate (my.ssa.gov)
$
If none, enter 0
$
Tip: Not sure of your Social Security estimate? Visit my.ssa.gov to see your personalized statement. Use a conservative estimate โ claiming earlier or having gaps in earnings history will reduce the amount.
Step4
Your Retirement Savings Goal
Retirement Number 2 โ Convert your annual income need from savings into a total portfolio target using the 25ร planning rule.
Formula โ Step 4a
Annual income needed from savings = Inflation-adjusted spending โ Income from other sources
Formula โ Step 4b
Retirement savings goal = Annual income needed from savings ร 25
About the 25ร rule: This is a simplified planning shortcut tied to a 4% starting withdrawal framework (Bengen, 1994; Cooley et al., 1998). It is a baseline, not a guarantee. Your actual sustainable withdrawal rate will depend on your investment mix, market conditions, and length of retirement.
Step5
Projected Savings at Retirement
Retirement Number 3 โ Estimate what your current retirement savings may grow to by your target retirement date, without additional contributions.
Total across all accounts today
$
Formula โ Step 5
Projected savings = Current savings ร (1 + annual return) ^ years until retirement
What this step does not include: Future contributions. Those are captured in Step 6 when you calculate how much you need to save each month to close the gap. This step only shows the growth of what you already have.
Step6
Your Monthly Savings Goal
Retirement Number 4 โ Turn your savings gap at retirement into a concrete monthly savings target. This is your action number.
Formula โ Step 6a
Savings gap at retirement = Retirement savings goal โ Projected savings at retirement
Formula โ Step 6b
Monthly savings goal = Savings gap ร Monthly savings multiplier (based on years and return)
About the monthly savings goal: This uses monthly compounding with end-of-month contributions at the return rate you selected in Step 5. It represents what you need to save in addition to your current balance to reach your retirement savings goal. If the number feels large, Steps 7 and 8 in the book discuss ways to reduce it: increasing income, reducing retirement spending, delaying retirement, or accepting a smaller cushion.
Doneโ
Your Four Retirement Numbers
These numbers replace uncertainty with a measurable plan. Come back to recalculate any time your income, savings, or timeline changes.
Your Retirement Numbers at a Glance
Treat these as a living plan. Recalculate annually and any time your income, expenses, savings, or retirement timeline changes. Small adjustments made consistently โ a 1% contribution increase, one fewer year of retirement, a healthcare cost reduction โ can meaningfully change Retirement Number 4.
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