Retirement and Benefit Calculator The Retirement Calculator, like other tools on this page, is a great aid to help you understand where your income will come from after you retire. To learn more about retirement and benefit calculators, see the section later in this chapter. The following example shows a couple named Steve and Alice who have three kids. Steve has been working for his company for 20 years and has $150,000 saved. Alice works outside the home, and her gross annual income is $30,000. Steve and Alice are looking to retire in the next 10 years, and they plan to leave their jobs. They'd like to have some income at this time, but they're not planning to work again. Steve is 50 and Alice is 43. If Steve retires at 62 and Alice retires at 65, how much do they have left to spend? **Calculating the Required Retirement Income in this Example** To find how much they will have left over each year for the next decade, we have to calculate their Required Retirement Income. First, we must know how much they will need each year. In this example, they will need $48,160 each year for the next 10 years, or $480,320. The calculator found this number using the formula to determine Required Retirement Income. Next, we must subtract from that amount any Social Security or pension income they might be getting. In this case, Steve will be eligible for Social Security at 62 and will receive $1,150 per month, or $14,800 per year, for the rest of his life. That adds up to a yearly Social Security payment of $171,600. That means $171,600 is subtracted from $480,320, leaving $308,720. We must now add to $308,720 the couple's pension benefits from their company. Because we are trying to determine how much they will need to save to meet their goal of having $2 million in savings, we're going to ignore the small pension that Alice gets. The company's pension plan has an estimated benefit at retirement of $40,000, which means Steve will have $308,720 left over to spend each year. Alice doesn't have any pension from her company, so she will have no benefit from that. However, because she has a pension from the city, it's now time to take a look at that income. If she has been working for the city for many years, she's likely to have a large pension that she will receive during her retirement. Using the Pension Calculator, we found her projected pension to be $28,160 per year. This is an annual benefit. Subtract $28,160 from $308,720, which leaves $280,560 left over to spend each year. Now we add Steve and Alice's income together. Steve and Alice will be left with $280,560 per year each to spend during their retirement. This is great news! With a household income of $560,560 a year, they will have a lot left over to spend on themselves each year. Steve will be spending most of his time golfing on the weekends and fishing on the weekdays. They will have quite a lifestyle. The calculator will now use a formula to determine the couple's Required Retirement Income. This required retirement income for a single person without a pension is shown here: **The Required Retirement Income of $280,560 Per Year** Now that we know how much they will have left over each year, let's take a look at the math that comes with the lifestyle. We need to find how many years we'll need to pay off the home and how much we'll need to save each month. **Saving for the Home** We will be saving $3,948.42 each year in order to pay for the home in six years. If we do not save this money, our home equity will go away in about 10 years. Let's review how we reached this number. First, we have the $280,560 we need to spend each year, minus the $28,160 that Alice has left over. That leaves $252,400 available each year. Then we must subtract $48,000 that we will need for the house, leaving $204,400. We must then subtract $25,960 that we will need each year for their three children's education, leaving $178,440. This amount is what we will need to save each year so that our home has equity in six years. **Lifestyle Summary** To get a better idea of what Steve and Alice's lifestyle will be, we took their required retirement income, subtracted their social security, added their pension income and then added back in their home equity. The results were as follows: **A Look at the Required Lifestyle** It is important to remember that this number can vary widely depending on income and many other factors. Income can increase or decrease, home prices go up and down, and inflation can also affect these numbers. **Monthly Income Needed to Live During Retirement** Next, let's take a look at the monthly income that Steve and Alice will need in order to meet the required lifestyle they have chosen. The calculator found this number for us by subtracting the required retirement income from the income Steve and Alice receive. **Steve and Alice's Required Retirement Income with Their Monthly Income** **The Required Retirement Income of $252,400 Per Year** In this example, they are not able to pay off their home in the next six years, so they will continue to have a mortgage payment until they can. They will have $10,939 in monthly retirement income. **The Required Retirement Income of $204,400 Per Year** Again, Steve and Alice will not have enough money to pay off their home in the next six years. They will still have a mortgage payment. However, their mortgage will not disappear in 10 years; it will only disappear in 20 years. **The Required Retirement Income of $178,440 Per Year** Now that we know their Required Retirement Income and the mortgage payment, let's see how much that leaves over after they make the house payments. The calculator will figure this out for you using the equation for Required Retirement Income. **Required Retirement Income with Their Monthly Retirement Income** Remember the calculator is figuring out what is needed to pay off the house. Now let's see how much they will have left over each month after making the mortgage payment. **The House Payment with the Required Retirement Income** Next, let's see how much they will have left over each month after paying for their food and clothing. **House Payment with the Required Retirement Income and Monthly Income Needed** Notice the total in the last column is about $5,400. This means that even though the Required Retirement Income number is about $60,000 per year, the Monthly Income Needed is about $35,400 a month. This means that even though Steve and Alice have a nice amount of income each month, they are still going to have a big mortgage payment, and they will need to pay for their food and clothing. This is very important to understand. For example, this scenario may not work for them if they like to have a lot of expensive dinners out each week. They may not be able to meet their goal without cutting back on their food budget. It's essential to meet with a financial advisor to determine what you can afford. **Average Required Income and Monthly Income Needed** Let's use our calculator to see how the required income and income needed for each retirement scenario differ. In this case, because the required retirement income is $52,500 per year, Steve and Alice will have to save $4,500 per month to make sure they can meet their lifestyle. **Required Retirement Income per Year** | **Average Required Income Needed Per Month** ---|--- $20,080 | $1,500 $25,280 | $1,900 $31,720 | $2,400 $41,440 | $3,300 $57,840 | $4,500 Notice the required retirement income per year is $52,500; however, their average required income for their monthly income is $3,300. **Required Retirement Income with Average Required Income Needed** Now let's take a look at a couple named Ben and Sara who are going to retire soon. Ben and Sara are both 64 years old and have one child. Ben has been working for his company for 20 years and has $150,000 saved. Sara works outside the home and her gross annual income is $25,000. Ben and Sara are thinking about retiring and looking to give up their jobs in a couple of years. They would like to have some income at this time, but they're not planning to work again. Ben is 58 and Sara is 55. If Ben retires at 62 and Sara retires at 65, how much do they have left to spend? **Calculating the Required Retirement Income in this Example** To find how much they will have left over each year for the next decade, we have to calculate their Required Retirement Income. First, we must know how much they will need each year. In this example, they will need $47,040 each year for