Retirement Planning in Your 20s (& Beyond), Part 1: Estimating Annual Retirement Expenses

It seems like most advice for young people planning for retirement consists of "save as much as you can now, and figure out how much you'll actually need later." Your 20s is a great time to save and take advantage of the wonders of compounding interest-- and there are so many variables involved in predicting future retirement needs-- so this is quite good advice, if it satisfies you.

The problem is, it doesn't satisfy me! I really like having goals, targets, an idea of where I'm going and how well I'm doing. So as challenging as it seems, and even though it's probably an unnecessary step at my age, I still want to come up with "my number," even if it's one that gets revised many times in future years.

That's what this brief series of posts will be about: me stumbling towards an estimate of how much I need to accumulate for my retirement, and hopefully finding it a little simpler than those crazy calculators that always ask questions I don't know the answer to. Feel free to play along at home, but please note that I am not an expert, and in fact would absolutely love any suggestions or information from you to help me along in this process. (Also, these steps should work just as well for people in their 30s and beyond; it's just that it seems like you've all done this already!)

For starters, I want to try to estimate how much income I'll need in retirement. (All numbers will be in 2006 dollars for now, and we'll adjust for inflation later.) I see so many people talking about wanting six-figure retirement incomes: $100,000, $200,000, sometimes even more. When you run the numbers, the amount you need to save to produce those amounts seems astronomical and overwhelming. (Although doable for some people, I'm sure.)

But those don't feel right to me. One common suggestion to calculate your retirement expenses is 80% of current expenses. 80% of my current expenses (not counting student loan payments) would come out to about $12,000 a year. Which sounds really, really low. Maybe my current style of living is way off from what I'd want in retirement; even though I bet I'll continue to be frugal, there are probably some inconveniences I'll no longer be willing or able to put up with to save a buck or two.

Then I found this data from a study of older Americans. It finds that the average expenses of a married person over 65 was $14,762 in 2001. Maybe I'm not so far off! And even for couples in the top 20% of income, average expenses (per person) was $25,567, spending about 1/4 of that on entertainment and gifts. (There's all sort of interesting data in the report to help you think about what you might end up spending; all the tables in the appendix are a great place to start.)

Based on these numbers, I think I'm going to go ahead and use $25,000 as my yearly expenses/income-needed number (in 2006 dollars; I promise I'll adjust for inflation later!). If it's (almost) enough for the average person in the top 20% of income, it ought to be more than enough to cover a frugal-minded little old lady like me. And it's more like 160% of my current expenses, rather than 80%. I feel like my expenses might actually end up lower in reality, but I might as well play it on the safe side in these estimates.

For those of you who've done this step, would you be willing to share what you came up with as your annual retirement income, in dollars or as a percent of current income? Or maybe just talk about the process you used to come up with it? I don't think I've ever seen anyone talk about a number in the ballpark of my $25K; is yours anywhere near it, or do you think I'm crazy? And for those of you reading who've never tried this-- play along at home! What do you come up with?