Estimated Monthly Expenses in Retirement
Annual Passive Income in Retirement (include Social Security)
Withdrawal Rate From Retirement Portfolio:
One of the biggest financial questions people have is, how much is enough? How much do you need to have saved before calling it quits? There are many methods to answering this question. Some calculators use sophisticated market simulations and base the number on what might happen in the stock market. Other calculators will look at your current age, expected retirement date, how long your retirement will last (a nicer way of saying what age you will die).
There are a lot of different ways to answer the question, how much do I need to retire?
The future is filled with uncertainties and no calculator is perfect. Trying to accurately predict what will happen in the future is oftentimes a fool’s game. That being said, we all want/ need to know how much it will take to retire comfortably. Ninja Piggy’s retirement calculator allows you to find out how big of a portfolio you need to meet your desired annual income in retirement.
Instructions on Using the Calculator
First, you need to estimate your expenses in retirement. A good place to start is examining what your monthly expenses are today, and compare the current amount to what you want/ have to spend money on in retirement. Some expenses in retirement may go down, such as mortgage payments (hopefully you retire debt free), retirement savings (you’ll now be taking money out, instead of putting money in), and payroll taxes (you won’t have a job). Other expense may go up, including traveling and healthcare. You have to make the most educated guesses you can about how much your monthly expenses will be in retirement. The calculator takes your estimated monthly expenses in retirement and multiplies it by 12 ( the number of months in a year, if you couldn’t figure that one out :-)). The resulting amount is your desired annual income in retirement.
Once you know how much you need, then it’s on to how you get there. Add up all the passive income you may be receiving at retirement. Passive income can include rental income, royalties, or any other income that you don’t have to work for. To find out how much your Social Security should be (fingers-crossed) at retirement, you can click here. I’ll leave it up to you on whether or not you want to include Social Security. Handling income from your investments, like dividends from stocks you own, or payments from peer-to-peer (P2P) lending requires special treatment. We want to make sure you aren’t double counting. If you choose to include your passive income from your portfolio, then you need to subtract the amount from your portfolio size. As an example, say you have $425,000, of which $100,000 is in a portfolio of P2P loans. The portfolio is paying you 5%/year in interest, or $5,000/year. You can add the $5,000 to your annual passive income amount. To avoid double counting, when you compare your current portfolio size to the final number in the calculation, Portfolio Value Needed in Retirement, subtract the $100,000 from your current portfolio size ($425,000) to arrive at $325,000. You would then compare your (adjusted) current portfolio size of $325,000, to the Portfolio Value Needed in Retirement, in order to determine your current shortfall/surplus.
The calculator takes your annual income needed in retirement and subtracts the annual passive income in retirement to arrive at the additional income needed in retirement. The additional income needed in retirement is what you are going to rely on your portfolio to generate. To solve for how big of a portfolio you need, the calculator takes your additional annual income needed in retirement and divides by a portfolio withdrawal rate (0%-5%). I recommend using the standard 4% withdrawal rate. If you feel that rate is too high, given the low interest rate environment we are in, feel free to use a lower number (which will result in needed a far bigger portfolio in retirement). The Portfolio Value Needed in Retirement is the number you should strive to reach, the sooner you get there the better.
Notice this calculator doesn’t need your current age, expected retirement age or your expected date of death. The whole idea behind the calculator is, once your portfolio reaches the desired amount, you’re set for retirement, regardless of your current age. Of course, there are always risks involved and the future is uncertain, and nothing is guaranteed when it comes to investments. The sooner your current portfolio size matches your desired portfolio, the sooner you’ve achieved financial freedom. If you’ve just cashed in on the sale of your business at age 32, and pocketed $2,500,000, you can live off $100,000 per year the rest of your life at a 4% withdrawal rate.
Now that you know how much you need, figure out how and when you are going to get there.