Unlocking Financial Freedom: A Guide to Calculating your Retirement Needs

By Billy and Akaisha Kaderli

Special to Financial Independence Hub

Billy and Akaisha Kaderli, early retirement advocates, simplify the process of estimating your retirement savings needs.

Akaisha and Billy at the Tour Eiffel, Paris Image courtesy RetireEarlyLifestyle.com

Are you preparing to retire?

It’s going to happen someday, no matter if you want to retire early or later these questions below need to be answered.

How much do I need to retire?

Without going into complicated spreadsheets and analysis, a simple way to determine your “number” is to multiply your current annual spending by 25.

First you need to figure out what you are spending per year. Do you know? Most people have no idea where their hard-earned dollars go.

We offer an easy-to-use spreadsheet in our book The Adventurer’s Guide to Early Retirement, or you can make one yourself. The important thing is that you know how much you are spending annually.

For illustrative purposes let’s use this data

The 2022 Consumer Expenditure Survey by the Bureau of Labor Statistics reveals that the average American household’s monthly expenses total approximately $6,081, equating to $72,967 annually. We will round this to $73,000.

Are you above or below this average? Remember, this is not your take-home pay, but how much you are actually spending on rent/house payment, car, insurance, gas, clothing, and everything else that you spend money on.

Using the 73K figure, multiply this by 25 = $1,825,000 Dollars is how much you need to have invested in liquid assets. Most studies use 60% stocks, 40% bond portfolio. In our opinion that’s a bit conservative but it all depends on your personal risk tolerance. In our case Social Security and cash are our bond equivalent; thus we have a higher stock allocation.

Regarding Social Security, do you know what your estimated annual payments will be? Simply go to SocialSecurity.gov and create an account. All of your contributions and work history will be there as well as the number of quarters you have accumulated. You need a minimum of 40 quarters of work history to qualify for your payments.

Don’t get discouraged by the $1,825,000 figure, but how are you going to get there?

Based on December 2023 data from the Social Security Administration the average monthly cheque is $1,767.03 or $21,204.36. Multiply this figure times 2 in your household equals $42,408.72.

$73,000 expenses minus $42,409 in Social Security payments leaves a $30,591 income deficit that you need to create from your investments to cover your expenses.

Looking better?

Now let’s multiply $30,591 times 25 and your new “number” is $764,775 that you need to have invested in a stock/bond/cash portfolio.

If you are retiring early like we did before your retirement age, you will need to have enough invested to cover your living expenses before receiving your Social Security. Maybe that is 20 years or more so you need to plan accordingly.

How to get to your number

Hopefully you’ve already started investing and have a growth portfolio that is matching market returns or close to it using the ETF, VTI, Vanguard Total Market. Now you know how much you have to contribute through the years to arrive at your target, assuming that you will continue spending $73,000 per year.

In our experience after retirement, our spending decreased, mostly as a result of Geo-Arbitrage and going car free. As a result, we have mentioned numerous times, now at age 71 we are increasing our spending purposefully.

From NerdWallet, this chart shows the household net worth by age.

Age of head of family Median net worth Average net worth
Less than 35 $39,000 $183,500
35-44 $135,600 $549,600
45-54 $247,200 $975,800
55-64 $364,500 $1,566,900
65-74 $409,900 $1,794,600
75+ $335,600 $1,624,100

You can see that a household in the 45-54 years age already has the $764,775 needed in the above example. This is assuming that they sell the house, which is where most people’s net worth is and invest the proceeds. Again, this is what we did as our retirement dream was and still is to travel the globe and accumulate experiences rather than things.

Everybody’s idea of retirement is different and there is no one size fits all. What’s important is that you create the retirement lifestyle that works for you, and not to be afraid to make adjustments along the way.

Retirement life is as fluid as your life is today. Once you become Financially Independent, opportunities like repositioning cruises, weekday skiing and cheap airfares will become normal and you can choose how to proceed.

For more on Retirement Topics, click here and here and don’t forget to signup for our free Newsletter.

Billy and Akaisha Kaderli are recognized retirement experts and internationally published authors on topics of finance, medical tourism and world travel. With the wealth of information they share on their award winning website RetireEarlyLifestyle.com, they have been helping people achieve their own retirement dreams since 1991. They wrote the popular books, The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible available on their website bookstore or on Amazon.com. This blog first appeared on their site and is republished here with permission. 

Leave a Reply