How Much Money Do You Need to Retire?

by Krantcents · 22 comments

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Everyone says money!  How much is enough to take care of you for the rest of your life?  Do you have a number?  Does it cover inflation, medical insurance and all your  “needs” and your “wants”?  Fidelity says you should have at least 8 times your ending salary! Whatever you think, you need to add ten percent!  Why?  You probably underestimated how long you may live.

How do you figure out how much you need for the rest of your life? A lot of people say they need one, two, three million dollars.  In other words they back into the yearly amount of money they need to live.  Some people take their current earnings times 30 or 40 to find what they need.  This does not include inflation or the things like travel or other activities that may occur during retirement.  Most retirees expect to be active, travel, participate in a lot of activities and do a lot of things with friend s and family.  You must consider you will have a lot more free time if you are not working.  Do you plan on retiring early?

Start planning your retirement now! What do you want to do?  How much money will you need to maintain your lifestyle?  For example, how much will you travel?  Would you visit relatives, your children, grandchildren or just travel?  How often?  How long will be away?  Will you stay in a hotel? How much money will you spend while you are away?  What activities will you like to do?  Do these activities cost money?  Will go out to lunch with friends every day?  Will you golf or play tennis every day?  Have you thought of everything?  Probably not!  Add ten percent to your number.

Now you have a good estimate of how much you will need.  Your estimate should be about 25 times your first year’s expenses.  That portfolio will last about thirty years.  What is next?  How are you going to accumulate the money to support your retirement?  Win the lottery?  I don’t think so!  Your retirement savings will probably encompass a 401(k), IRA, Roth IRA, brokerage account, real estate, and cash.  In addition, some may have a business, income property, pension or Social Security.  Inflation can reduce your nest egg as much as a volatile stock market!  An average of 3% inflation per year means your cost of living will double every 24 years. Don’t forget medical insurance increases faster than the inflation rate. A diversified investment portfolio is your best protection against volatile markets and other risks.

Start saving early!  If you have a retirement savings goal of $1.5 million (25 times $60,000), the earlier you start to save the more likely you will reach your goal!  You can contribute as little as $3,000 per year (that’s less than $10 per day) and have $1,615,440 based on a 7% return.  When you start your first job, enroll in the company 401(k). Your company may have a match, or it may not.  Don’t let that stop you from having a 401(k).  The principle advantage of a 401(k) is having your retirement savings grow tax deferred.  In other words, pay taxes based on your tax bracket when you start withdrawing from your 401(k) in retirement.  Open up a Roth IRA too.  Contribute as much as you can.  Roth funds grow tax free. You may not be in a higher tax bracket, but there are other advantages to the Roth IRA. The best part of a Roth IRA is you do not have withdraw the money unlike your traditional IRA.

Final thoughts

Saving for retirement requires the same planning as living your life.  A budget is essential for living and retirement!  Budgets are used to help you reach your financial goals.  Developing a financial plan for retirement will be even more important because you will have less time to generate your savings again.  Your investment strategy must include your financial goals, plans and investment allocation. What is your vision of retirement?  Do expect to keep working or relocate to another country? What do you expect to do to keep you interested, stimulated and happy? Money is just part of the plan not all of it!

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{ 14 comments }

JoeTaxpayer April 16, 2014 at 7:46 am

8 times income? This means being able to withdraw about 30% of final income as an annual income after retiring.
I agree with you, don’t look at income, look at spending.
I know you suggest bumping 10%. I’ll offer this – Don’t count Social Security. Not at all. if you retire early, you don’t want the pressure of worrying you’ll spend down your savings and hope that SS will be there. By ignoring it, you’ll get a bonus that will make up for a bit of going over budget or an unkind market.

Krantcents April 16, 2014 at 9:14 am

I believe in multiple income streams! Social Security should be just one them. Retirement planning does not stop because you retired or met your goal. I think you need to have budget or some control of your spending in retirement too.

Bryce @ Save and Conquer April 16, 2014 at 11:14 am

I don’t believe that some multiple of income has much to do with what your portfolio value needs to be at retirement. As you pointed out, it has to be based on expected expenses. I am afraid that the 25 times first year expense may not be enough, if this low interest rate environment persists. The 25 times expenses number is the same as saying a 4% annual withdrawal rate, adjusted for inflation each year, which was first presented in the Trinity Study. My wife and I are planning on a 2.5% safe withdrawal rate (SWR) when we retire. If our expenses are higher than what we expect, we will have room to increase our SWR a bit more. We plan to adjust our withdrawal rate if our personal circumstances or market conditions change.

Krantcents April 16, 2014 at 1:50 pm

Retirement estimates seem to be a moving target! It is different for everyone, but I think this is a pretty good way to estimate what you will need. I expect yo live 30 years in retirement and I will use a 2-3% withdrawal rate.

Marie April 16, 2014 at 11:59 pm

Early savings and making a right budget would definitely help us to ensure our retirement days. I’ve been thinking about how much do I need when the time comes that I need for my retirement.

Krantcents April 17, 2014 at 8:12 am

Early and consistent contributions to retirement savings trumps a lot of mistakes. $40 a week will grow into a huge sum if you start at 22 years old.

Holly@ClubThrifty April 17, 2014 at 5:22 am

I’m not sure how much money we need to retire. In the meantime, we’re just saving and investing all that we can. I hope we know when we get there, but we’re just 34 so it will be a while. We could probably retire earlier but I think we’ll wait until our kids are through college and weddings!

Krantcents April 17, 2014 at 8:16 am

Years ago, I determined I needed $6K a month in income to cover my needs, if I have no debt (mortgage, etc). That covers my needs! It is probably higher than I need, but I plan to fund it through a pension and Social Security. My IRAs, Roth IRAs and brokerage accounts will fund my wants.

Peter April 17, 2014 at 11:46 pm

I think doing all of personal finance 101 is must when it comes to preparing for retirement. My father tells me to have at least 3 kids and raise them right and teach them to take care of you when you get old like he did… LOL. Also maybe getting a teaching job after you retire looks like a good option for me. When I was in seminary, I had a Hebrews professor who was 85 and Theology professor who was 80.

Krantcents April 18, 2014 at 7:39 am

I elected to become a teacher when I was 55 years old. I plan to retire (again) at 70.

The Thrifty Issue April 18, 2014 at 4:28 pm

We aren’t as close to our retirement goals as I’d like. We have been working on multiple streams of income. I haven’t sat down and worked out an exact figure yet, but will be today.

Krantcents April 18, 2014 at 5:44 pm

Even a small contribution is better than nothing. You can always add to it later. Time is the biggest advantage in investing.

maria@moneyprinciple April 19, 2014 at 1:54 pm

Depends on what you mean by ‘retire’? We are both in occupations where we probably won’t stop working – we’ll just not be employed in traditional jobs. We calculated how much we need (I don’t believe bold patch figures like 20 times your current expenses and things). We are working towards that…

Krantcents April 20, 2014 at 10:16 am

I think I will move on (retire) in 2.5 years! The retirement figure become personal depending on a variety factors based in income streams.

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