Get a Ballpark E$timate of Your Retirement Needs
The American Savings Education Council's Planning and Saving Tool
Forget, for a moment, the complexity of planning and saving for a comfortable retirement. Use this print form Ballpark E$timate® worksheet to get an initial fix. Want a more “sophisticated” number? Go online at www.choosetosave.org and use the interactive version with more assumptions that you can change. By simplifying some issues, such as projected Social Security benefits and earnings assumptions on savings, the print
version of Ballpark offers users a way to obtain a rough first estimate of what Americans need for retirement. The worksheet assumes you’ll realize a constant real rate of return of 3% and that wages will grow at the same rate as inflation; however, it does provide the user an opportunity to take into account longevity risk.
For example, let’s say Jane is a 35-year-old woman with two children, earning $30,000 per year. Jane has determined that she will need 70% of her current annual income to maintain her standard of living in retirement. Seventy percent of Jane’s current annual income ($30,000) is $21,000 (Question 1). Jane would then subtract the income she expects to receive from Social Security ($12,000 in her case) from $21,000, equaling $9,000 (Question 2). This is how much Jane needs to make up for each retirement year.
Jane expects to retire at age 65 and if she is willing to assume that her life expectancy will be equal to the average female at that age (86), she would multiply $9,000 by 15.77 for a result of $141,930 (Question 3). Since Jane does not expect to retire before age 65, she does not answer Question 4. Jane has already $2,000 in her 401(k) plan. She plans to retire in 30 years so she multiplies $2,000 x 2.4 equaling $4,800 (Question 5). She subtracts that from her total, making her projected total savings needed at retirement $137,130. Jane then multiplies $137,130 x .020 = $2,742
(Question 6). This is the amount Jane will need to save in the current year for her retirement (it is assumed the annual contribution will increase with inflation in future years).
It is important to note that the calculation above assumed Jane would have an average life expectancy for a female already age 65. However, this will produce an amount that is too low in approximately 1/2 of all cases. If instead Jane wanted to have a sufficient amount 3/4 of the time, she would base her calculations on a life expectancy of 92 (see the grid on Step 3 of the calculation). This would necessitate multiplying $9,000 by 18.79 for a result of $169,110. All the remaining calculations would be similar and the contribution for the first year would increase to $3,286.
If Jane would prefer to save enough to have a sufficient amount 90 percent of the time, she would assume a life expectancy of 97. This would require a first year contribution of $3,671.
Helping Americans learn about savings and retirement planning is ASEC's primary mission. A coalition of private- and public-sector organizations, ASEC's goal is to make saving and planning a vital concern of Americans. Through the Choose to Save® national education program and other initiatives, ASEC works to raise public awareness about what is needed to successfully ensure long-term personal financial independence.
Copies of the Ballpark E$timate worksheet are available on ASEC's web site at http://www.asec.org/ and at http://www.choosetosave.org/
ASEC is a program of the Employee Benefit Research Institute Education and Research Fund, a 501(c)(3) nonprofit, educational organization.