What are the variables? If we look at the question from a mathematical perspective, we need to have figures for specific variables. These figures must answer the following questions:

• What are your annual expenses right now?
• What is your income right now?
• How much are you saving right now?
• What are the balances in your accounts right now and what type of accounts are they?
• What do you expect your expenses to be in retirement? (More? Less?)
• How many years do you have between now and retirement?
• What will your sources of income be in retirement? (i.e., Social Security, pension, 401(k), etc.)
• How many years do you plan on being retired?
• What do you expect inflation to be when you retire?

Consider a hypothetical. Let’s walk through a hypothetical scenario involving the fictional Ms. Doe. (Note: These figures are in today’s dollars and not inflated.) Ms. Doe has expenses of $46,000 per year and her income, after tax, is $70,000 per year. She is saving $10,000 per year. She has $5,000 in a savings account. She expects her expenses at retirement to be about $40,000 per year in retirement. She is 30 years old and plans to retire at age 67, when she can claim Social Security. She anticipates her Social Security income to be $33,348 per year. She has no other sources of retirement income. She expects to be retired for at least 20 years and doesn’t know what inflation will be at retirement. How much money does Ms. Doe need to save so she has enough money when she retires?

A financial planner may use an HP10BII+ calculator to give you some more exact numbers based on particular calculations, but for the sake of simplicity, to get a sense of what the general ballpark numbers may be, we’re going to approach this problem using some simple math. This is math you can do at home. Ready? Let’s figure out how much money Ms. Doe needs to have saved at retirement.

First, what is the gap between her expenses and income at retirement?

[Retirement expenses] – [Social Security Income] = [Annual income needed from savings], or $40,000 - $33,348 = $6,652 per year

Since she plans to be retired for 20 years, how much money will she need to have in savings in order to cover those years?

[Annual income needed from savings] x [number of years she plans to be retired] = [how much money Ms. Doe needs to have saved at retirement], or $6,652 x 20 = $133,040

According to this calculation, in today’s dollars, Ms. Doe needs to have $133,040 saved.

Now, Ms. Doe has said that she is saving $10,000 per year and plans to retire at age 67, which is 37 years from now. Therefore, [Annual savings amount] x [number of years between now and retirement age] = [Amount of Money Saved], or $10,000 x 37 = $370,000 

If Ms. Doe saves $10,000 per year over the next 37 years, she will have $370,000, which is a larger amount than the $133,040 needed to cover her expenses in retirement.

What about your situation? Where do you start? The basic building blocks for reaching your goals are the numbers for your income and expenses. Those numbers will help you gain an understanding of how much money you may need to save to reach a particular lifestyle goal, whether that is retirement, a second career, or any goal you would like to achieve. 

You may use the basic math above to gain a sense of how much you need to save in order to cover your expenses in retirement. Although some variables were not included (i.e., inflation, taxes, annual rate of return, etc.), after you answer the questions according to your personal financial situation and calculate those figures into the formulas, you may gain a general ballpark figure of how much you need to save.

Empowering resources. To learn more, check out these resources.

• Social Security Create your personal my Social Security account so you can learn about the program and track your benefit amount over time. http://ssa.gov/myaccount
• Financial Industry Regulatory Authority (FINRA) Retirement Calculator Jot down your answers to the above questions and have them ready to enter into this calculator. Please note: you will need to also have figures for an inflation rate, your current tax rate, your retirement tax rate, and your assumed average annual return on your money.  https://tools.finra.org/retirement_calculator/
• FINRA Smart Investing Courses Learn about investing basics. https://www.finra.org/investors/investing/investing-basics/smart-investing-courses

Personal finance is personal. Only you know what you want your money to do for you and we live in a time where reputable resources are available to empower you, strengthen your knowledge about personal finance, and educate you on how you may take actionable steps to reach your goals. Take advantage of what is available. 

Wendolyn Forbes is a CERTIFIED FINANCIAL PLANNER™ with Wealth Transition Finance, A Member of Advisory Services Network, LLC, where she offers financial planning and investment management services for either a one-time or on-going cost. Wendolyn is a fee-only financial planner and member of the National Association of Personal Financial Advisors (NAPFA). For more information about Wendolyn’s financial services practice, please visit her website at www.wtf-asn.com.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.