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
Well, it’s a 1 million dollars question (and you also need it!)
I’ve read several books rearding the “downgrade” life to spend less, retire early and get a stress free life.
I like your article. I’m also moving in this direction but keeping a part time job and spend my free time to learn how leverage my income with no-speculative investment
OOOOH, I like where you’re going with that. It’s basically what I’m going to be talking about in my next post.
I’ll be working well into my 70’s unfortunately. Money is not what it once was and retirement is not at all something that we can do as a society like the generations before us.
It’s not unfortunate when you consider that working will stave off senility and other mind numbing illness’.
I also know you to be a very risk averse person, so I suspect that pulling in a steady income for as long as possible would fit your situation.
And continuing to work, at least part-time, into your “retirement” years can also stave off the very common condition of retirement-related depression. People who have been working full-time for decades and then suddenly have nothing to do can struggle with their new living situation.
I actually would enjoy a week or two of just plain vegging.
Im glad Im still in my early thirties and already started on planning for the future.
Imagine at 30 and you are planning to retire at a late age of 65, and lets just estimate life expectancy till 85, we may use your calculation and estimate at about 1.8 million and that’s how much we need to save, BUT, put in inflation of about 4-5% (in my country) a year, it’s probably gonna end up to be ALOT more.
great post anyway, everyone should start investing early, and nothing beats making sure you are asset rich, like owning a few real estate.
I agree. I’d just like to add that my calculation as rough as it may be, does account for inflation.