How Do I Calculate My Retirement Savings Needs?

Planning for retirement is one of the most important financial decisions you will ever make. While saving consistently is crucial, knowing how much you need to save is equally important. Everyone’s retirement needs are different, depending on lifestyle, health, family responsibilities, and life expectancy. The good news is that you can estimate your retirement savings needs by following a structured approach.

Table of Contents

Step 1: Estimate Your Retirement Expenses

Start by thinking about the lifestyle you want after retirement. Ask yourself:

Where will I live? (In my own home, rented house, or a retirement community?)
What daily living costs will I have? (Food, utilities, transport, healthcare, leisure activities)
Will I still have financial responsibilities? (Loans, dependents, insurance)

A common guideline is that retirees need about 70%–80% of their pre-retirement income each year to maintain a similar lifestyle. For example, if you currently earn Sh100,000 a month, you may need around Sh70,000–Sh80,000 per month in retirement.

Step 2: Consider Your Retirement Age and Life Expectancy

The earlier you retire, the more savings you need. For instance, retiring at 55 means you’ll need more funds compared to retiring at 65.
Also, factor in life expectancy. On average, Kenyans live into their 70s, but many people live into their 80s or 90s. To be safe, plan for at least 20–30 years of retirement.

Step 3: Calculate Your Total Retirement Fund

Multiply your estimated annual retirement expenses by the number of years you expect to be retired.

Example:

Monthly expenses: Sh80,000
Annual expenses: Sh960,000
Retirement years: 25

Total savings needed = Sh960,000 × 25 = Sh24 million

This means you will need around Sh24 million to live comfortably for 25 years after retirement.

Step 4: Factor in Inflation

Inflation reduces the purchasing power of money over time. An expense of Sh80,000 today might cost Sh150,000 or more in 20 years. To protect your savings, plan for inflation by either increasing your savings rate or investing in assets that grow faster than inflation (like stocks, real estate, or pension funds).

Step 5: Subtract Other Income Sources

Your savings target doesn’t have to come from personal savings alone. Consider:

Pensions (e.g., NSSF or employer-sponsored schemes)
Investments (real estate, dividends, bonds)
Side income (consulting, part-time business)

If these sources will provide, say, Sh30,000 a month, you only need to save enough to cover the balance of Sh50,000 a month in our example.

Step 6: Use the 4% Rule as a Guide

A popular rule of thumb is the 4% rule, which suggests you can safely withdraw 4% of your retirement savings each year without running out of money.

Example:
If you need Sh1 million a year for expenses, you’ll need about Sh25 million in savings (because 4% of 25 million = 1 million).

Step 7: Adjust as Life Changes

Your retirement needs will evolve with time. Review your savings plan every few years or when major changes happen (marriage, children, career shifts, health issues).