How much money do I need to retire? This is one of the most common questions that I have been asked as a financial professional. There are a lot of considerations to take into account, let me explain.
Considerations to Make
The amount of money that you need to retire is going to be really specific to your situation and your life.
After all, some of us can live pretty “comfortably” on $40k-50k per year while others might need $120-150k per year to be “comfortable”. In that scenario, those two people would likely need an entirely different amount of money to retire.
It is also important to remember that to retire you do not need to be a specific age, you just need to have a designated amount of money.
So understand that no two people will be in the same situation and thus need the same amount of money.
Here are some considerations that you need to make when asking yourself, “how much money do I need to retire”.
- The age that you would like to retire.
- How much money you already have saved.
- Your age.
- Your income.
- Your other financial obligations.
- The possibility of taking care of aging parents.
- Long-term care insurance.
- Your family health history.
- What kind of life do you want to live?
- Do you want to travel all around the world or all around your house?
- The debt you carry.
- Do you have children/heirs that you would like to leave money to upon your death?
- What life insurance you have.
- Where you plan to live in retirement.
- Your anticipated social security benefit.
- Marital status.
- Plans to work (or not work) in retirement.
- How long you anticipate living.
- Your risk tolerance.
- Investment philosophy.
- Etc.
As you can probably see, there are an infinite number of considerations that you need to take when deciding how much money you need to retire.
But with that said, there is a starting place that you can go to to begin to get a clear picture of the amount of money you will need to retire.
Let me show you.
The MINIMUM Amount of Money You Need to Retire
There is a lot of guidance out there on the amount that you will need.
Some financial experts suggest having saved multiples of your income by the time you hit certain ages. Here is an example from Fidelity:
- 1x your income by age 30
- 3x your income by age 40
- 6x your income by age 50
- 8x your income by age 60
- 10x your income by age 67
This is certainly good advice for the masses. However, it is a little more generalized than I like to be.
So here is the formula that I like to use to determine the MINIMUM amount of money that you need to retire.
80% of your pre-retirement gross income
X
The number of years you plan to live
=
Minimum amount of money that you need to retire
Let me explain how this works.
You probably don’t know how much money that you will be making right before you retire. But do you best to make an educated guess. Think about your career trajectory and how much someone at the level of job that you aspire to be toward the end of your career is making.
As far as knowing how long you plan to be retired, an ugly way of saying this is “how long do you plan to live?”
Of course no one knows. But again, you can make an educated guess? How is your health? How long do people in your family tend to live? Do you smoke, do drugs, or drink excessively? Use that as a jumping off point.
As long as you are saving money consistently, you have won more than half the battle. If you get the wrong number, you can change it later. No problem at all.
So for example, if someone who makes $100,000 per year wants to retire at 65 and they think they will live until they are about 90 the calculation looks like this:
$100,000 X 80% = $80,000
$80,000 X 25 years = $2,000,000
Again, this is the MINIMUM that you would need.
Also, remember that this is simply a jumping off point. A good financial advisor will be able to more clearly define the answer to the question, how much money do I need to retire.
Final Thoughts
The most important thing to remember from this article is that there are no two people who have the same exact retirement number. Everyone is going to have a different situation and have a different set of circumstances that guide their retirement calculator.
But this is an excellent place to begin. 🙂
I am here for you!
You can do this!
Until next time!
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