How Much Does a Teacher Need to Retire?

How much does a teacher need to retire? That’s easy!

42. Million. Dollars.

Okay, that’s not true at all. It’s almost certainly MUCH LESS than that.

For geek reasons, I just wanted to answer something with 42. And, sometimes it’s nice to have an easy concrete answer.

Unfortunately, personal finance isn’t that concrete. Context and personal circumstances matter, so the answer will be different for everyone. 

We can get to an answer though. It’s actually relatively easy once you understand the critical factors.

In this post, I’ll walk you through how to get to YOUR answer to that original question: How much does a teacher need to retire?

The process works for just about any profession, but teachers have a few potential advantages we want to capture. We’ll include that in our work. By the end, you’ll know more than you do now.

Before we dive in – just a reminder that I’m not a financial professional. I’m writing from my own experience and about the process I use. Before you make any significant decision on what you read here, you may want to consult a professional. At the very least, remember to take whatever you read on the internet with a grain of salt.

How Much Does a Teacher Need to Retire? The Components

We’ll work through five major aspects to get to your answer. They are:

• Expenses
• Time Frame
• Future Income (Including Pension Estimates)
• How to Handle Uncertainty
• Withdrawal Rate

Your information and assumptions in each of these areas will determine your final number. The good news: once you understand how to get to a number, you can adjust these assumptions and redo your number as often as you like.

When we first did this exercise, our target amount was significantly higher than it is now. We were less confident in it and our time-to-financial-independence was years longer. We cut off years and now expect to hit financial independence by 2022.

How much do you need to retire? You’ve asked a great question. Answering it will lead to dramatic improvement in your life in several ways. Even if you don’t like your initial number.

Let’s get started.

Expenses

You need to know how much you plan to spend in retirement. Many internet retirement calculators start with the assumption that you’ll spend 80% of what you’re spending during your working life.

That percentage is too high for many, too low for others. 

Before you can really answer this question, you need to know how much you spend now. If you haven’t yet, track your spending for a few months. It’ll be illuminating and empowering.

If you’re eager to get started and need an answer to this question you can simply take your current income and subtract what you save/invest each month. 

For example, if your household income is $100,000 and you’re putting away $10,000 each year, your current expenses are $90,000.

This is far too general, but it’s a starting point. For example, there are a number of factors that may potentially change. Just a few:

• You may spend less on transportation because you aren’t commuting to work every day (-)
• Your mortgage may be paid off by the time you retire (-)
• You lose your employer-provided health care and have to replace it (++)
• You want to travel more (+)
• Your kids will be adults and providing for themselves (–)

Your expenses estimate is something you’ll need (and want) to refine over time. It’s changed significantly for us several times in the past 4 years.

For now, we’ll assume that your annual expenses are $80,000 and you expect your changes will balance out. So, you plan to spend $80,000 per year.

Time Frame

When are you targeting retirement? This matters for a lot of reasons. For example, it will give you an idea of how much work you need to do to hit your number.

For purposes of calculating that number, though, it matters most because of inflation. Costs go up over time. A dollar (or whatever currency) today will not go as far in the future.

You need to pick a time frame to determine how big the impact will be. 

Current retirement projections typically use that 3% inflation estimate. The historic rate of inflation over the last 100 years is 3.3%. Inflation in recent years is lower than that. 

Let’s say you want to retire in 20 years. You’re assuming your expenses remain stable at that $80,000/year. 

Using an assumed rate of inflation of 3% you’ll need about $144,500 a year in 20 years.

If you were retiring in 15 years, it would be $124,600. You can see how much inflation matters and why your assumptions about time frame are important.

To carry it forward, you are assuming your expenses remain stable, a 3% rate of inflation, and you have 15 years to retirement.

Here’s a quick calculator to plug in your assumptions.

Using 3% and 15 years in that calculator: You’ll need $124,600 in 15 years.

Income in Retirement

So, in 15 years you will need to cover $124,600 in spending. 

Now, you need to make assumptions about any income that might help cover that. Will you stop working entirely? Do you have rental properties that will cover part of it? 

Anything you can identify can be subtracted from your income requirements.

Most teachers have access to a very important retirement tool: a pension.

You need to make some assumptions about your pension. First, you’ll want to understand your teacher pension and how to estimate your benefit. 

Then, you’ll need to decide how you want to factor the pension into your FI plan. 

You may not want to count on it at all, or you may be very confident that you’ll get the benefit.

For purposes of answering this question, let’s say you live in a state with a well-funded plan. You run some calculations and believe your pension will pay $80,000 a year. Even better, you’ll be eligible for the full benefit at your 15 year target date.

At some point, you’d factor in social security in the same way. For now, let’s say you decide not to count on social security. (Some teachers get a pension in lieu of social security.)

So, we have $124,600 in spending and $80,000 will be covered by your pension.

You think about other potential sources of income, but decide you are going all-in on retirement.

$124,600 – $80,000 = $44,600

How to Handle Uncertainty

You may have noticed that in each section we are making a LOT of assumptions. I’ve suggested some, but they don’t reflect my personal level of comfort with uncertainty. They certainly don’t reflect yours.

We can never be certain about the future. That’s particularly dangerous when you think about the potential of running out of money in retirement. You need to decide how pessimistic or optimistic you want to be. Then, you’ll adjust assumptions accordingly.

If you want to be more conservative, you can do any (or all) of the following:

• Assume higher expenses in retirement
• Assume a higher rate of inflation
• Make lower estimates of income in retirement
• Reduce your pension benefit by some amount to factor in uncertainty
• Assume a lower safe withdrawal rate (more on this soon)

By being more conservative you decrease the chances you’ll run out of money in retirement. However, you increase the chances you will work longer than you have to.

On the flip side, if you want to be optimistic you can do the following:

• Assume expenses will drop in retirement
• Assume inflation is lower
• Factor in more income in retirement
• Include your full estimated pension benefit
• Assume higher investment returns / a higher safe withdrawal rate

This will give you an “easier” number to reach and a likely earlier retirement. The flip side – if your assumptions go against you, you may run out of money. 

My experiences with financial insecurity lead me to make more conservative assumptions. I use research and data to balance it out, but prefer to work a bit longer rather than run out of money. You may choose otherwise.

It’s also important to note you can always adjust in other ways during retirement. For example, I don’t assume a higher level of expenses because I believe we can adjust expenses down for awhile if necessary. 

Work to understand your own needs, and the various factors to make assumptions you are comfortable with. 

Choose a Withdrawal Rate

The withdrawal rate is the percentage of your assets that you plan to spend each year. For example, if you have $1,000,000 saved and plan to spend $50,000 a year your withdrawal rate is 5%.

$1,000,000 / $50,000 = .05

Our final step is to choose a withdrawal rate for the final calculation. I went into the need to determine your comfort with uncertainty prior to this section because it comes into play in a massive way here.

Most of the FIRE (financial independence retire early) uses a 4% withdrawal rate assumption. This is based on several studies, including the oft-cited Trinity and the original work by Bengen.

There are three important factors to note:

• The studies are based on historical data. The past is useful information but has no actual bearing on the future.
• The studies find that with a 4% withdrawal rate your money is almost certain to last for a 30 year period. 
• In the majority of time periods, your assets actually grow with a 4% withdrawal rate.
• It assumes a mix of stocks / bonds (not other asset classes)

Those factors are all somewhat contradictory and can make choosing a safe withdrawal rate difficult. In most conditions, it will be fine. The longer you are planning to withdraw, the less safe it is. 4% might be conservative in some cases.

For my own comfort, I became obsessive about learning more and recommend Big Ern’s series on Safe Withdrawal rate. He convinced me that 4% was too high.

Personally, I wouldn’t go higher than 4% in any circumstance. The longer your retirement horizon, the lower my rate assumption gets. We’ve currently built our plan using a 3.3% withdrawal rate. This is on the conservative side, but we’d rather have more than we need – we can always start giving it away!

Again, you need to decide your own place on the conservative/optimistic spectrum. Also, if you have other asset classes you may make different return assumptions. 

The Calculation – Time for An Answer

How much does a teacher need to retire? Let’s put it all together. 

Here are the assumptions I’ve made in this example for our hypothetical teacher. This teacher is what I would consider “medium optimistic.” They are assuming stable expenses, the standard inflation rate, full pension, and a withdrawal rate lower than 4%.

Once you’ve gathered all the factors, you can do the calculations. (we’ve been doing them along the way)

Step 1 – Adjust expenses for inflation. 

$80,000/year with 3% inflation for 15 years = $124,600

Step 2 – Subtract retirement income from expenses 

$124,600 (expenses) – $80,000 (pension income) = $44,600 

Step 3 – Factor in Withdrawal Rate

Remaining expenses / withdrawal rate will tell us the amount this teacher would need to have saved for retirement.

$44,600 / 3.5% = $1,274,286

Our Answer:

How much does a teacher need to save for retirement? This teacher needs about $1,275,000 saved.

The truth is that many teachers retire on their pension benefits alone. Others will be very comfortable with $1 million dollars in retirement assets outside the pension. Some may need more.

Hopefully, working through this exercise helped you understand the factors you need to consider and the levers you can adjust. Calculate your number as a starting point, then build a plan. Adjust along the way – and enjoy a comfortable retirement!

The educator in me believes that building conceptual understanding first, before doing the actual work, is important. If you’re ready to dive in and walk through it with calculations then I recommend Minafi’s Interactive Guide to Financial Independence. It will help you with this question and several others you may not have asked yet!