How much money do I need in retirement?

One of the biggest problems facing people planning for retirement is determining how inflation will impact monthly living expenses.  Most websites offer an online calculator to help you find the numbers.  For example, assume you currently spend $3,000 per month on food, clothing, hobbies and rent, and you plan to retire in 20 years.  Using an online calculator, in 20 years at 3.5% inflation, you will need $6,000 per month to maintain the same lifestyle.

The problem is, that these calculators don’t give you an intuitive sense of the time value of money.  What happens if you postpone your retirement by 5 years?  What happens if you retire in 20 years and your retirement lasts 35 years?  Each of these calculations would provide a new number, which you must record along with the scenario.  Behavior Science teaches us that people are better able to internalize data when it is displayed in a graphical form rather then a numeric form.  This is why analog watches are preferred over digital watches and why people prefer stock charts over spreadsheets to view stock performance.

Instead of offering an online calculator that gives an exact number, companies should use a graphical format that helps people visualize a range of numbers that more accurately represents the real world.

Here is how it would work.  First, find your current monthly expenses on the left side of the chart.  Then move your finger to the right the number of years until retirement.  The line that you cross tells you how much money you will need to sustain your current lifestyle assuming 3.5% inflation.  As you continue to move your finger to the right you will see how each year you need a little more money to compensate for inflation.

By using this graphical format, companies can give people a more intuitive feel for the amount of money the person will need for retirement.  In addition, the graph will make it easier to run different scenarios such as postponing retirement or the impact of a long lifetime.  This will help people better plan for retirement and understand that there are no exact answers for retirement planning so you need allow for deviation from your plan.

We will talk later about how much you need to save in order to withdraw the necessary money as detailed in this chart.