How Much Will It Cost For Me To Retire?

On this episode of the Ready for Retirement podcast, James tackles the topic of how much money you will need to retire. Many people have an inflated view of their retirement needs, thinking that they will need to save dollar for dollar what they currently need each month to maintain their standard of living. However, this is not necessarily the case because of the shifts in expense amounts between working life and retirement.

There are two main approaches for determining how much money you will need in order to retire: the bottom up approach and the top down approach. The bottom up approach is the most accurate but also the most time-consuming to determine, drilling down to your monthly expenses and one-time expenses during retirement to dictate how much income you will need to cover those expenses.

The top-down approach can be calculated rather quickly but it is not as comprehensive as bottom-up. This approach starts with your current net income and removes any expenses that will not be present during retirement while adding additional retirement expenses to help you determine your income requirements. It is important to consider which expenses are fixed versus variable, how inflation might affect your future expenses, and if taxes may impact your savings in the future.

Key Points:

1. Approach #1 – Bottom Up
   • The most precise but the most complex
   • Go through each expense category individually
     1. Add up your expected after-tax expenses during retirement
        1. Recurring
        2. One-time
   • What should your monthly income be to meet your living expenses?
2. Approach #2 – Top Down
   • This is a simple, semi-accurate starting point
   • Look at the income you are living on today
     1. Subtract the expenses that won’t be there during retirement
     2. Add additional expenses that will be added during retirement
   • What does an ideal retirement look like for you?
3. Considerations for both approaches
   • Will expenses stay the same or vary?
   • Inflation
   • Taxes

Timestamps:

1:15 – Approach #1 – Bottom Up

5:44 – Summary of Approach #1

6:07 – Approach #2 – Top Down

10:15 – Things you can back out of Approach #2

13:31 – Summary of Approach #2

14:00 – Considerations for both approaches

Resources

Budget Spreadsheet

Federal Tax Rates

State Tax Rates