Here’s how it works:
1. You have to start with an estimate of how much pretax retirement income you think you’ll need for each year you are retired. The Employee Benefit Research Institute says that 70 percent of your current annual gross income will allow you to maintain your current standard of living. Let’s say that figure is $40,000.
2. Add together your expected Social Security benefits and any defined benefit payments you expect. Let’s say you expect to receive Social Security benefits of $12,000 each year.
3. Subtract the total payments from line 2 from your estimated yearly income from line 1. So now we have $28,000.
4. Multiply the difference between your Social Security benefits and other such income ($28,000) and your desired pretax income by the number of years you plan to be retired—let’s say you’ll be retired for 25 years. That means, according to Bengen’s formula, that your nest egg should be $700,000 at the beginning of retirement.
Bengen’s 4 percent withdrawal rate gives retirees room for inflation-adjusted raises each year. For example, say you have a $1 million portfolio and you take out $40,000 the first year (4 percent). If inflation is running at 3 percent, the next year you can take out $41,200.
Is 4 percent necessarily The Number? Well . . . it’s close. But the point here is that everyone needs a starting point, because if you don’t have a start-ing point, how will you have any idea where you’ll finish?
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Find a handy worksheet for calculating how much money you'll need to bridge the gap between your current retirement savings and your retirement income goal at tcbmag.com/ideasopinions/personalfinance/worksheet.
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