How Much Do I Need to Retire?
How much do I need to retire? This is a question that everybody will find themselves asking during their working years. As a matter of fact, I would wager a bet that this is the most common quested posed to certified financial planners. This question may be frequently asked, but it does not come with a definite answer. This is because everyone's needs are different. What you might need in retirement is likely to be completely different than your friends or co-workers. Even through your situation is unique, there are still a couple of ways to estimate how much money you will need to retire.
The question 'how much money do I need to retire?' basically boils down to two main points; What type of standard of living do you wish to have when you retire? And, how much money you will need to save during your working years to be able to afford that standard of living when you retire. Another way to look at this is - how much do I need to save now for retirement? Or rather, what is the amount I need to live off of when I retire? Below are 2 methods that could be used to estimate the amount you need in order to retire.
Rule of Thumb Method
One common rule of thumb stipulates that you will need approximately 80% of your pre-retirement income during your retirement years. So if you are earning roughly $50,000 a year just before you retire, chances are that you will need roughly $40,000 of annual income in retirement. This rule comes with a few assumptions: you will probably have fewer expenses in retirement and that you may no longer have a mortgage loan to service, no dependents to support, and not actively putting money aside for retirement. As you can see, these are some very broad assumptions to make.
While the 80% rule of thumb may provide with you a quick estimate, it is far from perfect. For some people, they may in fact need more money in retirement due to their retirement plans. Some may be looking to buy a new house, do extensive traveling, or may simply be confronted with a medical condition that significantly increases health care expenses.
Detailed Expense Method
The rule of thumb method may be a good starting point for younger people, but as you approach retirement it is more appropriate to take a serious look at the amount of money you will really need. This is where the detailed expense method comes into the picture. The most effective way to estimate how much money you will need for retirement is to look at your expected income and expenses in retirement.
To begin with, you will have to identify your retirement income sources. What is your estimated Social Security benefit? Will you be receiving a pension? And how much will you have saved for retirement? Next, you can think about what your retirement expenses will look like. Will you still be paying off your mortgage in retirement? Will you be moving or making any large purchases? What is your life expectancy? Also, do not forget to factor in inflation into your calculations.
Once you have tallied up your monthly expenses in retirements, they will help you begin to see how much money you will need to have to cover these projected expenses. From the calculated figures, you can then have a rough insight as to what your projected retirement income will be and to determine if whether you will have a surplus or a deficit. This will help answer the common question of 'how much do I need to save for retirement'.
What to Do When You Don't Have Enough
If it appears that you haven't saved enough just yet, then it is time for you to start planning on making changes. There is little difference as to whether you are 30 years from retirement or just a few years away from retirement – taking action will ultimately lead to improvements in meeting your retirement needs. If you still have a few years until retirement, then you can consider increasing the contributions to your 401k or IRA plans. For those who may already be ready to retire, the added savings might not be necessary but it can still help.
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Comments
The only unknown factor is how long you can live after retirement. I think those with grandparents living beyond 100 have to prepare more money.
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