Financial Opinion and Insights

How To Calculate Retirement Needs

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

A Sample Case Study

While there is an abundance of software available to help planners and advisors in projecting financial needs for clients, the fact is few do an adequate job in this area.   It pays to know what’s “under the hood” of your software – or maybe better – to be able to do some meaningful calculations yourself, if only to demonstrate you actually do have a prudent process.  Anyone with a financial calculator (HP12-C or HP10B-II, for example) can perform these calculations.  Remember, however, even with these, there’s still some ambiguity.

 A Simplified Hypothetical Case Study Problem

Carl is 50 years old and has $500,000 in his 401(k).  He wants to retire in 13 years with $50,000 a year, in addition to Social Security, and wants his money to last 30 years (he isn’t worried about leaving money to his children).   He believes inflation over that period will average 3.5%.   He feels a long-term target of 6% is a realistic annual target return.   With that target in mind, is his $500,000 enough or how much more will he have to put away?    Note:  Let’s assume Carl is in the 40% (combined state and federal) marginal tax bracket.


There are three steps:

  1. Calculate the first-year need ($50,000) in inflated future dollars to protect purchasing power.
  2. Calculate the present value of the total needed for 30 years in retirement, beginning in the fist year, at the assumed investment rate adjusted for inflation and taxes, if additional is to be saved outside a tax-deferred vehicle.
  3. Calculate the annual amount to be saved by the end of each year and convert to a monthly amount.

Step #1.  The First Year Need.

                  $50,000    = PV

                  3.5%  = I

                  13   =  n

                  (solve) FV=  $78,197 This is the amount needed for the 1st year.

Step #2.  Calculate the Present Value of total need at beginning of retirement for 30-year period with earnings discounted for inflation: 

                  Compute after-tax yield:             6% * (1-.40) =    3.6%

                  Compute PV of total need for retirement discounted with inflation-adjusted returns. 

                  (BEGIN mode)

                  [((1.036/1.035)-1) x 100]    =        0.0966 =  i  (Inflation-adjusted tax-deferred rate would be 2.41%)

                  $78,197     =      PMT

                  30   =    n

                  (solve) PV =  $2,313,376  Present value of required amount at retirement.

Step #3.  Calculate the amount to be saved by the end of each year to reach the goal:

                  (END mode)

                  $2,313,376  =    FV

                  – $500,000  =   PV  (HP12-C and HP10-B-II conventions require (-) sign

                  3.6   =  i  (note:  if post-retirement tax-bracket is different, adjust this figure)

                  13  =   n

                  (solve) PMT =  $93,838  (divide by 12 for monthly amount to be saved)

Can Carl really save over $90,000 a year?  Even if the annual amount inside tax-deferred vehicles dropped the annual requirement to $66,036, it would appear some adjustments might have to be made.  This is when prioritization and goal-based planning can be important.