From Here to Financial Happiness

Day Forty Nine Calling It Quits

How much money do you need for a comfortable retirement? Here's the quick‐and‐dirty calculation: Take your current pretax annual income and multiply it by 12. Let's say you make $50,000 a year. For retirement, you'll want a net worth of around $600,000, defined as all money in financial accounts minus any debt.

What's the logic behind this calculation? One popular rule of thumb says that, in the first year of retirement, you can withdraw 4% of your portfolio's value and thereafter step up your annual withdrawals with inflation. Take that $600,000. A 4% withdrawal rate – equal to $4,000 for every $100,000 saved – would give you $24,000 for the first year of your retirement. That's almost half of the $50,000 annual income we assumed you were making.

On top of that, you will likely also receive Social Security. The typical Social Security benefit runs around $16,000 a year. Add that to the $24,000 from your portfolio, and you'd have $40,000 a year for retirement. Typically, Social Security replaces a higher percentage of your income from your working years if you were lower paid. If that's the case, you might be okay with a somewhat smaller nest egg – maybe eight times your current pretax annual income.

Similarly, if you'll receive a traditional employer pension, which will pay you monthly income in retirement, you might be safe amassing somewhat less. Let's say you are eligible for not just Social Security but also a pension that will replicate ...