Retirement is an essential part of everyones financial plan and one of the questions you may have been asking yourself as you’ve been planning is how much money do you need to retire? So in this article I’m going walk you through the steps and show how easy this really can be for you, and to do this I will be using my numbers as an example. So let’s get started.
5 Factors To Consider Before You Start
Before we jump into the how to part on how much will I need to retire, their are a few factors you need to consider before you get started. These factors are the variables that stand between you having a successful retirement or not having one at all.
- Taxes. First off, taxes need to be a part of this plan. You can pay your taxes in one of two ways, the first is you can pay them up front with a Roth IRA, or you can pay them when you retire and pull money out of your account. Either way you do it you will have to pay ordinary income taxes on that money.
- Inflation. The second factor you need to consider is inflation. This is the cost of goods and services going up over time. The best example I can give on this is gas prices. 15 years ago when I got my licenses to drive, gas cost less than a $1. Today we’re paying over $3 a gallon, and 15 years from now I expect things to increase even more simply because of inflation.
- Age. Third, you need to consider your current age and at what age you plan to retire. My suggestion is that need at least 30 years to save for retirement but if you can go longer than that do it.
- Rate Of Return. Next we need to consider the rate of return we plan to earn on average. As a general guideline try to average at least 8%. This is a fairly conservative number and not to over the top. Now you might argue that you could earn 10% or 12%, if it does that’s great but if it doesn’t you could be setting yourself up for disaster.
- Contributions. Finally, the last thing you need to consider is how much you are able to contribute to your retirement plan. This is just a matter of preference and what you have available to save.
Step 1: How Much Do You Need To Retire
To start you need to consider how much money is needed to retire, and to do this I will be using a great tool developed by Kiplingers which you can check out here. In my. case I would like to have at least $50,000 in annual income.
In the first step simply type in how much money you would like to have as an annual income each year. In my case I chose $50,000 since that is what I’m earning right now. Then select how many years it will be till you begin your retirement, and finally consider what percentage of your annual income you would like to receive each year. In may case I chose 100% but feel free to go less if you want.
Step 2: Social Security And Pensions
Now that we have a good idea of how much money we would like to have in retirement let’s consider any social security and pension income.
At this point you will need to decide how much of an income you will receive from social security and any pension you might have. In my case I’m not planning on getting any money from social security simply because I’m not sure what will actually be their when I’m even of age to draw an income from it. However if I do recieve an income from it I just consider it an extra added bonus.
Step 3: How Much Money Have You Currently Saved
The next step in determining how much money you need to retire is to consider how much money you already have saved.
In the picture above I currently have $30000 set aside. Below that you will have to decide what type of return you think you could average with your retirement account. In my case I chose 8%. Now I actually invest very aggressivly with my money but I like to plan with a lower interest rate since I know 8% is more attainable, however if I do earn 10% or better I’ll just consider it an extra added bonus.
Step 4: Home Equity
In the fourth step you need to consider if you will use the equity in your home as part of your retirement. A lot of seniors have been turning towards reverse mortgages as an extra option to provide a retirement income but it doesn’t have to be if you plan correctly.
If you plan properly you won’t also have to worry about having to deal with a mortgage either when you retire, luckily for me none of these issues are a concern for me.
Step 5: How Big Should Your Nest Egg Be
Finally, in the last step when your considering how much money do I need to retire, you need to determine how many years you expect to be in retirement. In my case I plan to be retired by 60 and based on my families age history I can expect to live to age 90.
On top of that I plan to invest 65% of my money towards stocks. Finally, you can also chose to add any additional assets you expect to receive at retirement. In my case I’m not counting on it, but you never know.
So now that we have completed all 5 steps let’s see how much I need for retirement.
In the picture above I will need at least an annual income of $104,500 to have the same $50,000 I’m spending today. On top of that I will need at least $2 million set aside to achieve my retirement goal, and finally I will need to save at least $1564 a month in order to hit this goal.
Now you might be thinking what if you can’t set aside $1500 a month? If you fall into the situation which a lot of people will you will either have to look into scaling back your retirement goal or finding an additional source of income to make this payment.
In the end when it comes down to how much you need to retire follow my simple 5 step plan and you should be right on track to a successful retirement. Feel free to share your thoughts, comments, and questions below.