This is the first in a series of posts for an online class on how to use your investments to fund your retirement. To find other posts in the series, select the category “Retirement Investment Class” under “Retirement Investing” at the top.

Maybe you’re getting close to retirement and are trying to figure out if you’re ready to pull the trigger. Or maybe you’re several years away, but want to know how much you’ll need to save up to fund a comfortable retirement. In this article, we’ll discuss how to figure out how much you’ll need to save up to fund your dream retirement.

The first step is to determine how much money you’ll need per year from your investment account to fund your lifestyle. There are two ways to do this, either through a yearly budget, or through your take-home pay. To determine this number through a budget:

- Prepare a budget with all of your monthly expenses, then multiply by 12 to find your yearly costs.
- Add lines to your budget for annual or semi-annual bills like home insurance, subscriptions, memberships, and so on.
- Add a monthly amount for your hobbies, meals out, and other optional expenses, then multiply by 12 to find your yearly amount.
- Decide on a certain amount of money to spend each month on general, random items that come up, then multiply by 12.
- Think of other expenses like yard maintenance, utilities, gasoline, car maintenance, and so on, and determine yearly amounts.
- Finally, think about vacations and other items, and determine an amount for the year.
- Add money for home repairs, car repairs, and other expenses.
- Determine how often you replace big items like your roof and air conditioner, estimate an amount for these items, and divide by the number of years between replacements to determine how much you’ll need to be saving for these items.
- Add everything up to determine your yearly cash needs.

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Alternatively, you could work backward from your net income. To determine your yearly cash needs this way:

- Determine your yearly take-home pay by finding a biweekly paycheck and multiplying by 26. (If you are paid weekly, monthly, or n some other schedule, figure out your yearly take-home pay using an appropriate method.) Alternatively, find a paycheck stub from the end of the year and see how much was deposited in your bank account.
- Determine how much extra you spend on clothes, gasoline, lunches out, and other items because you’re working and deduct this from your take-home pay.
- Think of hobbies, vacations, and other items you’ll buy in retirement beyond what you buy currently and add these items. You should have your yearly income needs in retirement at this point.

Let’s say you’ve done this and determined that you’ll need $50,000 per year in retirement.

Once you determine your income needs, determine how much will be covered by Social Security, pensions, and other payments you’ll receive in retirement. Subtract this from your total income needs. What is left over is your yearly income needs from your portfolio.

Now that you know how much you’ll need in income for each year from your portfolio, you can figure out how much you’ll need to have in an investment account to supply those cash needs. Here we’ll use the rule-of-thumb that you can withdraw between 3 and 4% of a portfolio of stocks and bonds each year without causing the value to decline. Generally, the investments in your account should be able to replenish the money you’re spending if you withdraw at this rate. If you withdraw more, you’re likely to see the value of your portfolio decline over time and eventually zero out. If you withdraw less, you’ll see your account value grow over time.

Let’s say you decide to be conservative and only withdraw 3%. You would then multiply your yearly amount by 34 to determine your needed retirement savings. If we need $50,000 per year, this would be:

$50,000 x 34 = $1.7M

You should also add about $250,000 for a single and $400,000 for a couple for healthcare costs. Let’s say we’re estimating for a couple, so add $400,000 to the $1.7 M we estimated earlier, and we’ll determine that we’ll need about $2.1 M for a comfortable retirement.

If your number is larger than you have, you’ll either need to find ways to scale back on your retirement plans or find away to raise the extra money. You may also want to work a bit longer since the longer you work, the more money you can raise plus the fewer years you’ll need to live on your retirement savings.

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*Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.*