How to Know 'How Much Money Do I Need to Retire?'

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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.

Retirement plans are highly individualized. One person's retirement plans might have to include a $2,000 monthly mortgage payment. Another's retirement plans don't include a house payment except for taxes and insurance since it is, or will be paid off. Determining monthly needs is easier for most people who have 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 12. 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, which include: rental real estate managed by someone else, guaranteed interest rates, online residual income and royalties, for example. 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 need. Many people benefit greatly from the realization that their residuals can count toward their 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: $5,000 - $500 = $4,500 needed for monthly retirement plans. Multiply that number by 12 to get your yearly need. Using our example, that equals $54,000 annually.

Multiply Step 3 by 12 and add 30 percent. Add 30 percent to cover margin of error and to cover inflation for a few years. If inflation rises at 4 percent per year you will use up your 30 percent margin of error in seven years. Don't worry, Step 5 will add even more margin to protect you. In other words, 54,000 * .3 = $70,200 per year needed for retirement plans.

Divide Step 4 by .06. That counts on an 6 percent 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. 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.

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.

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