Everywhere you go, you see various retirement articles telling you how much to save for retirement. One article will tell you that you need $1 million. Another article will tell you that you need $5 million. I don’t know about you, but the difference between $1 million and $5 million is fairly large.
From there we get into how much you can safely take out of your account every year. For years it’s been 4%. You’ve probably heard of the 4% rule. Well, now there is argument that the 4% rule cannot be followed.
I don’t know about you, but all of this conflicting information gives me a headache. To solve this problem, I sat down and realized something: the amount I need in savings is simply my annual spending multiplied by years of retirement. Pretty simple right? Let’s see this in action.
Look At Your Spending
The first step in figuring out how much money you need for retirement is to look at how much you spend. You can go about this a few ways.
The easiest way is to look at your annual budget. If you don’t have a budget, you can either create one or do a rough estimate of how much you spend. Two notes about this:
First, having hard data from a budget is much better than just creating something on the fly. It will be more accurate and while it might not seem like a big deal now, in the future when you run out of money because your estimate was too low, it will be a big deal.
Second, if you estimate, make sure you add 10-15% to that number. Trust me, everyone, and I mean everyone, underestimates how much money they spend. When I worked for a high net worth financial planner, we had millionaires who underestimated their spending.
Once you have your spending amount, you can go to the next step.
Consider Your Years In Retirement
The next step is to figure out how long you will be retired. Do you want to work until age 65 or do you want to retire early? We all have an idea of when we plan to retire. This is the easy part. The hard part is figuring out how long you are going to live. Again, using information from my financial planning days, we used age 95 as our estimate. The idea here is to estimate long. In other words, it’s better to save more just in case you make it to that age than to just save for 5 years and live another 20.
Putting It All Together
Now that you have all of your information, you can figure everything out. Let’s use an example here to see how this works. Let’s say my annual spending is $30,000 and I want to retire at 65. I will use my length of retirement as 30 years (age 95). To figure out how much money I need, I simply multiply $30,000 by 30. This gets me to $900,000.
If I can save $900,000 for retirement, I should be fine. If I work until 70 instead (only 25 years in retirement, I would need $750,000.
Tips and Notes
It really is this simple to figure out how much you need for retirement. Some might be wondering about mortgage and car payments, etc. You probably have them now, but won’t in retirement. Therefore, aren’t you over-estimating your retirement expenses? Technically the answer is yes.
The caveat to this is that there is no guarantee you won’t have a mortgage when you retire. Maybe you will move to a warmer climate when retired and have a mortgage on that house. Or you might buy a car in retirement and have a car loan. At the end of the day, you just don’t know what expenses you will have in retirement.
In the best case, you will not have a mortgage or car payment. This will just mean you have more money for travel or giving to your kids or even spoiling your grand kids.
Final Thoughts
When it comes to saving for retirement, put down all of the articles you see and figure out how much you will actually need. As you can see, figuring it out is a lot easier than you think.
[Source:savvyscot.com]Sourse: Thefinancebucks.com
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