Everyone wants to know a magic number or rule of thumb to aim for in retirement. However, how much you need for retirement depends on a number of individual factors. Redeeming Riches offers this helpful list of things to consider when planning for retirement:
- Income and assets: This is how much you make now, and how much you will have coming in after you retire. Look at your assets as well: Home, investments, savings, retirement accounts, etc. Also look at whether you will continue receiving some sort of income (from Social Security, passive income streams, part-time work, etc.) after your official retirement.
- Expenses and liabilities: These are outflows of cash. Do you have debt that you will be continuing to pay? What bills do you have now? What are your current expenses? Will you be reducing them or increasing them? What are your plans for after retirement? Do you want to travel or just hang out doing nothing?
Now is the time to start considering these questions and making an action plan. If you are near retirement, you will want to consider ways that you can stretch your retirement funds.
Many people say that you will need 70% or 80% of your current income in order to maintain the same lifestyle you have now. However, this doesn’t take into account the fact that you might still have debt. If you have paid off all of your debts, than this might be a reasonable estimate. Personally, though, I like to think about expenses. Add up your current expenses and figure that is what you’ll need. Of course, even this method requires that you consider adding a little bit, depending on your future plans:
- Travel considerations.
- Long-term care.
- Rising health costs.
- Other unexpected costs.
You should also consider the 4% rule. This rule says that as long as you withdraw 4% or less from your assets each year, you should be able to live on your investments indefinitely. This means that if you figure that you need $50,000 a year to live comfortably, you will need investments totaling $1.25 million when you retire. Of course, you if don’t mind running out of money in a couple of decades, or if you plan to have some other source of income, then you might not need that much. And, obviously, if you think you need more than that to live comfortably, you’ll need more money saved up. If you think that $75,000 is required to live comfortably, your nest egg, using this rule of thumb, will need to be $1.875 million.
In the end, how much you need for retirement is a matter of personal preference and the planning you put into it. Plan ahead to get out of debt and save up, and you will be well-positioned for a prosperous retirement.