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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