How Much Money Do You Need To Retire?August 27th, 2012 by Aaron Koo
This is a question with a lot of moving parts and variables to think about. I suspect that most people’s retirement plan is to save as much as possible and budget their lives around how much they have saved up. This is the plan I discourage the most. Rather than investing to get what people want, these types of people leave themselves open to whatever life has to offer. They’re not living the retirement they would ideally like to have.
This could be a lack of research into their goals, ignorance of the issue, or perhaps they were too conservative and/or reckless in their investment choices. While I personally can’t help that, I can give a basic guideline.
When I meet with my clients, there are two questions I get my clients to think about: What do you want for retirement and how do you want to get it? Those are very broad questions, so let’s look at a few specifics.
What Do You Want?
If you spent some time to give honest thought to what you wanted for your retirement, what would that look like? If you’re having trouble wondering, ask yourself these questions:
- When do I want to retire? 40? 50? 60? 70?
- What type of lifestyle do you want to live? Lush? Frugal?
- A bit on the ambiguous side, how long do you think you’ll live? The last thing anyone wants to have happened in retirement is to outlive their money.
All this pondering leads to one big question: How much money do you need?
The Math Involved
A simple formula to have a rough figure is to look at your life now. How much money would you like to have on a monthly basis. Consider that you most likely won’t have a mortgage to pay. How much would that number be? $2000? $5000? $1,000,000?
Whatever that number is, multiply it 12 to get your annual income needs. Take your life expectancy and subtract your ideal retirement age. Multiply your annual income needs by that number. That’s a very rough number and it hasn’t accounted for one, very important variable… Inflation. This will scare the crap out of a lot of people but it’s a necessary step.
To account for that, I’ll use the age of 30 to retire at 60. So year after year, inflation will erode the buying power of the dollar by 70%. And don’t forget that once you retire, inflation doesn’t simply stop. Remember that number you came to after multiplying your annual needs with the life of your retirement? Multiply that happy little number by 4. And voila… You now have your retirement income needs.
It’s A Big Number
The thing to remember is that as we get closer to our goals, they become clearer in our minds. Early on, it’s important to aim for something broad and then to narrow it down and become more specific as the years go on. I didn’t give much in the way of how you’re going to get there, but that’s for another article for another day.
Formula for Retirement:
(((life expectancy)-(retirement age))x(annual income needs))x(4 for inflation)
Example: ((80-65) x 30,000) x 4 = $1.8 million
Filed under Money.