We all know that we need to invest for retirement. But, how much is enough? How much do we need to live comfortably? How much should we withdraw in order not to outlive our money? These are some huge questions, and a lot of the answers depend on what assumptions and inputs you make into the calculations. I wanted to share with you some quick calculations that you can make to see where you stand with the “average” person saving for retirement. While this is not a replacement for careful investment planning, but it is a great start.
In general, it is believed that you will need approximately 80% of your pre-retirement income to live off of when you finally retire. That 80% can come from Social Security, a company pension, IRA investments, annuity payments, or any other financial vehicles. So, if “I” is your income and “R” is your retirement income, the formula would look something like…
I x 80% = R
Another rule of thumb is that you should withdraw only 3% to 5% of your nest egg every year to support your lifestyle in retirement. So, lets say that we chose 4% to withdraw from our investments every year, “R” is again your retirement income and “E” is your nest egg’s total value. So, based on this that formula is…
E x 4% = R
So, we can use a little bit of high school Algebra 1 (My mom would be so proud. She was a high school Algebra and Geometry teacher.) and rearrange the formulas. So, now your formulas should look like…
I x 80% = E x 4%
Multiple each by 100 to get rid of the percentages. I x 80 = E x 4
Divide each side by 4 and you get E = I x 20.
Still with me? See that wasn’t so tough of a math problem. So, translated into words, the rule of thumb in this simple scenario is that your nest egg should have approximately 20 times your income at retirement in it in order to retire and withdraw 4% a year and not outlive your nest egg. So, for example, someone making $50,000 a year should have a goal of having $1 million saved for retirement in order to replace 80% of that income by withdrawing 4% a year.
There are quite a few good financial calculators on the internet that can help you determine what may be right for you in retirment.
Now, I am not a financial planner, and everyone’s situation is different. You should seek the help of a qualified professional. The tips and topics discussed here are not a substitute for great financial planning advice from a CFP.