How much money do I need to retire? Glad you asked. Retirement plans are difficult enough to make without worrying about how much you need to retire.
Follow these steps to get personalized answers to your retirement questions. How much you need to retire is based on the answers these steps help you determine for your retirement plans.
DETERMINE YOUR MONTHLY INCOME NEEDS.
Retirement plans are highly individualized for this reason. One person's retirement plans have to include a $2000 a month mortgage payment. Another's retirement plans don't include a house payment except for taxes and insurance since it is, or will be paid for. Determining monthly needs is easier for most people with multiple monthly bills.
Get out a calculator and get a good estimate of your monthly needs during retirement. Cover all of your expenses dividing yearly expenses by twelve. Don't forget entertainment, eating out, travel, and unexpected expenses. Let's give it a number just for illustration sake: $5,000 a month.
ADD UP YOUR MONTHLY RESIDUAL INCOME.
Residual income is any income you will continue receiving with little if any work on your part: rental real estate managed by someone else, guaranteed interest rates, online residual income, royalties, etc. Estimate on the very conservative side of any variable residuals for your retirement. Plans get quickly nixed when income shifts during retirement. Plans that are conservative are most likely to last.
** One key residual you may consider counting is social security. However, many younger generations are advised not to count on social security being a part of their retirement packages.
Again, we'll use a number for illustration's sake: $500.
SUBTRACT YOUR MONTHLY RESIDUALS FROM YOUR MONTHLY NEEDS.
Many people benefit greatly from the realization that their residuals can count toward the retirement plans. Just subtract the result from step 2 from the result of step 1 to get the monthly need for your retirement.
In this example: 5000-500= $4500 needed for monthly retirement plans. Multiply that number by 12 to get your yearly need. Our example = $54,000
MULTIPLY STEP 3 BY 12 AND ADD 30%
Add 20% to cover margin of error and to cover inflation for a few years. If inflation moves at 4% per year you will use up your 30% margin of error in seven years. 8 years if inflation stays with the last 100 year average of 3.4. Don't worry, step 5 will add even more margin to protect you. 54,000 * 1.3 = $70,200 per year needed for retirement plans.
DIVIDE STEP 4 BY .06.
That counts on an 6% yearly return without cutting into your nest egg principle. You should be able to get better than that, perhaps significantly if you are wise. However, there are always down years in the market. You need to have cushion. In our retirement plans example it would calculate this way:
70,200/.06 = 1,170,000. That's one million, one hundred and seventy thousand.
If you want to be additionally conservative, add another 15 percent chunk onto your retirement plans nest egg to cover rising costs or down markets.
** See tips below for more on figuring out how much you need to retire.
Tips & Warnings
- Be sure to include any investments you plan on selling at retirement into your retirement plans for the final nest egg.
- The earlier you figure out your retirement calculations the better, since time multiplies savings more than any other factor.
- 44% of everyone who calculates their retirement needs significantly change their retirement plans.
- Photo Credit (c) Yuri_Arcurs l Dreamstime.com
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