It's the big question that comes to all of our minds at some point. And while you'll find there are many calculators and charts out there on the internet it is really not that complicated to figure out yourself.
In this article I'll show you the 2 calculations you need to make when determining your target savings level using nothing but elementary math or perhaps a cheep calculator if you're lazy.
How much income do you need to live now?
The answer to this question is usually pretty close to the amount of income it will take to support you in retirement. After all, most of us do not want to lower our standard of living during our golden years.
And yes, some expenses we have now such as a mortgage or taking care of children won't be a concern for us in retirement, but on the flip side other things will cost more such as our health care costs or paying someone else to do the upkeep on the house or yard.
So, if you need $50,000 of annual income to support yourself now you're going to want to have $50,000 of annual income in retirement. So back to our original question, how much money do you need to have in retirement to support that kind of income? To find the answer take the amount of income you need and multiply it by 20.
$50,000 X 20 = $1,000,000
It's going to take $1M to generate $50,000 of annual income in retirement. So now we have the answer to our question right? Unfortunately, not quite.
Note: This is assuming a 5% investment return in retirement. If you would like to be more conservative and assume a 4% return simply multiply by 25 instead of 20.
How many years will it be before you retire?
Because of inflation this becomes a very important question. Inflation is basically when your dollars do not buy as much as they used to buy.
When I was in high school and first learning to drive I could fill up my car at the gas station, walk inside and get a Coke, go to the cashier and pay for it all with a $10 bill. And I usually received back some change!
How much did you pay last time you filled your vehicle with gas? The dollar simply doesn't purchase as much gasoline as it used to. It doesn't purchase as much of anything as it used to.
Inflation will continue to erode the value of your dollars. So need to have more money to make up for this devaluation.
How much more?
Historically in the United States inflation has run at close to 3%. For a quick and simple estimate take your target savings amount, in our example $1,000,000 and multiply it by 1.5 if you have close to 10 years until retirement. Multiply it by 2 if you have close to 20 years until retirement. And multiply it by 2.5 if you have closer to 30 years until retirement.
$1,000,000 X 1.5 = $1,500,000 (10 years to retirement)
$1,000,000 X 2 = $2,000,000 (20 years to retirement)
$1,000,000 X 2.5 = $2,500,000 (30 years to retirement)
As you can see for a person 10 years away from retirement who wants to have $50,000 of income it is going to take $1,500,000 to produce it.
But 5% of $1,500,000 is $75,000 and I only need $50,000?
This is true, but remember due to inflation in 10 years $75,000 will only buy what $50,000 can today. $75K looks better on paper, but you won't be wealthier.
So now you should be able to come up with a helpful ballpark number for how much money you need to retire. Here's to all of us getting there!