I'd say once or twice a week I get the question "How much money do I need to retire?" My response is typically, "Well, it depends." The "magic" amount of retirement dollars that each person / couple needs really depends on a few basic factors:
• How soon before you plan to retire?
• How long are you going to live (do you have longevity in your genes)?
• How much do you plan to spend in retirement?
If you can just answer those three questions, we can likely get you a pretty good answer. It's the third question that typically stumps new clients because they usually haven't had to keep track of their spending for many years so they really don't have a good idea as to what they are currently spending, let alone what they will spend in retirement. Here's a simple exercise to determine what you are spending now, after taxes.
• Start with gross income from all sources (wages, business income, rental property income, etc.)
• Subtract taxes paid (federal, state, FICA and Medicare)
• Subtract what you are currently saving (kid's college, retirement accounts, taxable account, etc.)
• This should leave you with an approximate total of what you are spending.
This method obviously takes a look at current spending at a very high level. To get a more in-depth itemization of what you are spending your money on, you may want to utilize a software that can break it down for you. Mint.com and Quicken are two such programs that some of our clients currently use, but there are several others to choose from as well.
The bottom line is this – to get a better feeling for what retirement spending is going to be for you, we would advise you to start living like you are in retirement now. After 4 – 6 months of taking this project seriously, you should have a pretty good feel for how much cash flow you're going to need and hence, when you can retire.