How much is enough? When can you say that you’ve saved sufficiently?
Unfortunately, experts don’t agree how to determine exactly how much money you need to have set aside for retirement. Fortunately, there are some factors on which they have a consensus, and you can learn about some of the theories of retirement calculation and determine which might best fit your anticipated needs.
THE 4% RULE For Retirement
The most common retirement savings calculation is the 4% Rule, which means that you will need to plan to live on a 4% withdrawal from your savings each year. So, if you needed to withdraw $40,000 to cover expenses each year, assuming you will be retired for 25 years, you’ll need to have $1 million saved for retirement ($1 million x 4% = $40,000). Or, if your yearly spending is $100,000 in annual spending, you would need a sum of $2.5 million saved. But if you can reduce your retirement spending, and live on $50,000, you’ll only require $1.25 million. Other income streams, such as pensions and rental property, can reduce the amount of retirement income you’ll be drawing.
Theoretically, you should be able to withdraw 4 percent at first, then a similar amount adjusted for inflation every year for 25-30 years of retirement with very little risk of running out of money.
To keep in mind with the 4% Rule:
- If your money is invested,
- The 4% Rule assumes that you have a portfolio evenly split between stocks and bonds. An all bond portfolio likely won’t generate the returns needed to make the 4% model work. T
- The 4% rule assumes a relatively stable market with the generally predicted ups and downs and normal economic conditions. If there were to be an horrific market for a significant length of time, that could leave those planning with the 4% Rule high and dry.
- Also, the 4% Rule was created during a specific time in stock market history that may not be replicated.
- In addition, the 4% Rule doesn’t take into account things like varying tax brackets, investment costs, or a change in spending habits. For example, those that pay an investment advisor 2% of their worth each year may find the 4% Rule not beneficial.
Alternative Options to the 4% Rule:
Constant inflation-adjusted spending: In this scenario, the retiree withdraws a certain percentage of their savings or investment portfolio (approximately 2.85%) the first year, while annually adjusting for inflation and other factors. For an income of $40,000 a year, lowering the rate of withdrawal from 4% to 2.85% increases the needed retirement savings from $1 million to about $1.4 million; however, withdrawing less than 4% each year retains more money for unforeseen needs.
Floor and ceiling rule: Under this guideline, you begin withdrawing a regular percentage, but increase their withdrawals up to 25%in bull markets with the promise they reduce to 10% lower than regular withdrawals if a bear market(s) occurs.
Guyton and Klinger’s decision rules: And in this calculation, you start with a higher withdrawal rate of 4.95% and adjusts accordingly through both bear and bull markets
So, how much do you need to retire? Unfortunately, there is no fool-proof calculator for that amount; it’s a number only you can decide. Only you know the lifestyle you want to live in retirement. You are also most familiar with the kind of factors that could affect your retirement number, such as pensions, tax brackets, investment choices, and social security. Lastly, only you know whether you’re a spender who needs help staying within the boundaries or a saver who is just planning on spending enough on himself to get by and leave for children or grandchildren.
The best plan is to start saving right away, and start saving as much as you can. Because, 4 percent rule aside, every penny you save is going to help. If you’d like to make some calculations on your own, check out this financial freedom calculator. It uses the 4% rule, as the base of calculations, but you can change the assumption, if you want to look at retirement savings based on one of the other models.
When determining what your average monthly budget should be, take these account:
- Pensions & Social Security
- Health Care
Here are some factors to consider when deciding whether your nest egg is ready to be broken out of its shell:
- Your current age.
- Intended retirement age
- Life expectancy (as calculated by your Primary Care Physician)
- Current earnings.
- Income sources during retirement (i.e. Social Security, rental income, etc.)
- Amount of current retirement savings.
- Expected savings contributions.
- Cash expenditures during retirement.
And here are questions you need to be asking yourself as you make your financial calculations:
- What do you see your retirement looking like?
- What is your salary?
- What will you collect from other sources, like Social Security, pension, etc.?
- At what poinwill you retire?
- What is your life expectancy?
- What are you doing with your savings, i.e. bank savings vs. investment?
- How much money to maintain your lifestyle times 20-25
To summarize, according to this financial and business writer you can plan on saving 10-20% of your income with the goal of accruing 10 times your final salary. Or . . .
- By 30: Have the equivalent of your salary saved
- By 40: Have three times your salary saved
- By 50: Have six times your salary saved
- By 60: Have eight times your salary saved
- By 67: Have 10 times your salary saved
Retirement in Conclusion
Practically, you can reach your retirement savings goal by contributing as much as possible in automated withdrawals, so you don’t even have to think about saving. And consistently up the amount you’re depositing (i.e. every 6months). In this way, you can build your nest egg and hopefully be able to feather it with some extras, as well.
Whichever method you use to determine whether you have enough in savings and/or portfolio to live comfortably in retirement, make those withdrawals and deposits into those accounts now, so they will be there for you when your retirement comes.
If you are interested in living well through your golden years, this site is for you! We want to equip, enable, and empower you with useful information about making wise financial and insurance choices, as well as living healthy and happy lives in retirement. We hope you enjoy the articles our experts provide!