How Much Do You Need To Retire?
For many years a million bucks was the gold standard to have saved up for retirement. That amount would pretty much cover maintaining an average cost of living for most people. The problem is that this number is more fitting for a much different generation, namely the baby boomers, and younger generations think it still applies to them.
So who wants to be a millionaire?
The reality is that a million dollars simply won't cut it going forward. Now it's a safe bet to say that most people should aim for having about 2 to 3 million by the time they reach retirement. That being said...
Most people NEED to be MULTI-MILLIONAIRES and this might be a mental block for some and that will be the first hurdle to overtake.
It may seem daunting getting started but this can be done in 3 easy steps:
- Desired income
- How long it needs to last
- Determine how much you'll need
Inflation is the silent killer of wealth. You won't even feel it but we hear about it all the time. The dollar menu has been replaced with the value menu and the prices at the pump are crazier than ever.
If your entire nest egg is sitting in a bank account you're actually losing money year after year. Think of inflation as causing erosion to your financial foundation slowly over a long period of time.
You simply can't save for retirement; you must invest for retirement.
If the rate of inflation is at 3%, and your savings account earns practically nothing, then that means you have -3% rate of return. Do yourself a favor and open a high-yield savings account to set your short term cash in so it at least keeps up with inflation.
The primary purpose of investing is to beat inflation. The purpose of this article is to go over how to plan for what you'll need for your investment plan which is one key component of financial success.
What does your future lifestyle look like?
This is actually kind of a trick question. Typically with goals we want them to be as crystal clear as possible. They're so vivid in our imagination that we can almost visualize every aspect with the 5 senses as if it were real right now.
It's a bit different when it comes to setting goals past the 5 to 10 year mark. The picture is fuzzy and will get clearer as you approach the deadline. In the meantime what we really want is to keep it at a high level vision so we can take action and set milestones for the path ahead.
If you planning for 20 or 30 years out there's a lot of unknowns of what life looks like. Relocations, grandkids, health status, debt levels, and future lifestyle are just examples of some of those areas that can look radically different over the next few decades.
So what do we do about these unknown variables?
Nothing, we want to keep this simple. We want to establish an initial target that we can start working towards and adjust along the way as we monitor and review.
For now let's start with the what we do know which is current lifestyle needs. If you want to shoot higher then go for it but make it reasonable. A good starting point is 75% of your current annual income to live off of in retirement.
If you're vision is to have $150,000 a year coming to you in retirement but you're making $75,000 right now then you'll need to adjust expectations. Building consistency is what will allow you to make your money grow over the long run.
How long will you need it?
Next we'll need to figure out how long we will need to live off our retirement nest egg without it running out. One of the big reasons why social security is in trouble is because its being used for something that it simply wasn't designed for.
When the program was first rolled out in the 1940's the average lifespan was about age 62. We've witnessed radical advances in medical care and nutrition. People are simply living longer and therefore drawing from a benefit that was designed as a short-term supplement to retirement rather than a long-term crutch.
This was also the golden era of the pension and gold watches for working a lifetime for one corporation. Pensions have gone the way of the dinosaur, no longer providing a steady stream of income, and the responsibility to prepare for retirement has shifted to the individual rather than employer.
No one knows how much sand is left in the hour glass of life but that won't stop us from planning at least. Knowing your family history is beneficial but not always necessary.
A worst case scenario is to be in your 80's or 90's and be in a tight spot for money with no way to get any more. It's not uncommon these days for people to hit the 100 year mark. Longevity is a financial risk.
If you retire in your late 60's then it's probably safe to assume that you will enjoy another 20-30 years if you've been taking care of yourself. Use that timeframe as a starting point.
How Much Do You Need?
Let’s break this down with a super simple example! Meet Harry. Harry is 35 years old and just starting to think about his future goals. He’s ready to make a plan to reach them. Right now, Harry earns $75,000 a year, but he hasn’t saved anything yet. He’s single, doesn’t have kids, and hopes that someday he’ll meet Mrs. Right. Harry loves to stay active and imagines working as long as he feels good, but by age 67, he wants to be in a position to work only if he chooses to, not because he has to.
Harry is happy with his current lifestyle and figures he’ll need about the same amount of income in retirement—maybe even a little less since he plans to have his house paid off by then. He’s thinking 20 years of retirement savings is a solid goal.
So, what’s the magic number for Harry?
Drumroll, please…
Harry will need a little over $2 million by the time he’s 67. If he saves a bit more than 20% of his income every year and earns an average return of 6% on his investments, he can get there in 30 years. That means Harry will need to save about $22,000 a year or around $1,800 a month.
Now, if Harry manages to earn a higher return on his investments, his savings goal might shrink a bit because his money will be growing faster. But it’s always smart to play it safe when planning for the future. A return rate somewhere between 6-10% is a good range to use for your own planning.
See how this all comes together? Now it’s your turn to figure out your target and make a plan to hit it!
Try it for yourself using a free financial calculator and see what you come up with.
The compound effect
Albert Einstein once stated that compound interest is the 8th wonder of the world.
Each year you earn interest on your investment and the following year your interest earns interest. Eventually it begins to snowball and form into something really significant. The real super power of compound interest though is time.
The more time you have on your side for your investments to grow the bigger your advantage. The younger you are the less you have to set aside because your money is going to be compounding over a longer period.
Check out the difference just 5 years make in how much Harry would have had to set aside:
Age
40: $2,218 per month
35: $1,802 per month
30: $1,492 per month
What a difference 5 years can make! If you're a little on the later side and don't have as long of a window that's okay. You may have to dig a little deeper and really focus on contributing to your retirement as much as possible.
I'm not going to say it's never too late start but I will say if you have at least a 15 year window you can do a lot to really set yourself up in a good spot. Once you know the "what" then you can figure out the "how".
Use an income allocation strategy to keep yourself aligned by putting money in it's proper place. Where to put your money for retirement and how to invest it will be covered separately so be sure to subscribe and look out for that in the future.
