With inflation on the rise, it’s difficult to say how much current economic conditions will affect your ability to retire when the time comes. One of the best things you can do to prepare yourself for success is to plan ahead. Here are a few ways to determine how much you should have saved in order to comfortably leave the work force.
The 10x Rule
Commonly, financial experts suggest you have 10x your pre-retirement salary saved up in order to retire. Under this method, you are expected to live off of 80% of your pre-retirement income. These numbers do not include any supplemental income such as social security, pensions or part-time employment. You also need to take into consideration the type of lifestyle you want to live. For example, if you plan on spending the majority of your retirement traveling, you’ll probably want to increase the amount of money you plan to live off of each year.
The 4% Rule
Another excellent strategy for figuring out the amount you need for retirement is by using the 4% rule. An article written by Jim Probasco for investopedia.com explains, “To determine just how much you will need to save to generate the income that you need, one easy-to-use formula is to divide your desired annual retirement income by 4%, which is known as the 4% rule. For an income of $80,000, you would need a retirement nest egg of about $2 million ($80,000 /0.04). This strategy assumes a 5% return on investments, after taxes and inflation, no additional retirement income, such as Social Security, and a lifestyle similar to the one you would be living at the time you retire.
In general, the 4% rule assumes that you will live for 30 years in retirement. Retired adults who live longer need their portfolios to last longer, and medical costs and other expenses can increase as you age.”
Other Factors
It’s important to consider other factors when deciding how much money you need to retire. As with any savings, the earlier you start contributing, the easier it will be for your money to accrue interest and grow.
You need to take into account your overall health. If you have health conditions that require lifelong medical care, it’s important to factor in those costs into your retirement amount. Lifestyle is another factor to consider. You need to decide whether or not you have family you can live with in the event you are no longer able to care for yourself. If not, factor in the cost of long term care. As previously mentioned, if you’re planning to do a lot of traveling during retirement, you must factor in those costs as well. Plan out your retirement as much as humanly possible so you don’t risk running out of money.
There are a lot of unknowns when it comes to how much money you’ll need to retire. Use these rules to help you get as close as possible.