The Rule of 25
It's always tricky to figure out how much you'll need for retirement; my goal of "millions" doesn't really tell me anything.
I wrote here about how to figure out what you need by setting a savings percentage goal each year and aiming for a multiple of your pre-retirement salary.
There's another simple rule you can follow based, instead, on what you want your retirement income to be: The rule of 25.
The idea is this; you need a sum of money that will last at least 30 years. So, figure out a sum of money that allows you to withdraw 4% the first year, and at least 4% each of the following years in order to give you the money you need.
1. Figure out your retirement income. Usually, you start with 80% or 85% of your pre-retirement income. Say you were making $100k/year when you retired, and you'd like to have $85k/year after retirement.
2. Estimate what social security (via your social security statement each year) and/or any pensions will give you. Subtract that from your goal, in this case $85k. Worried about social security or unsure about that? Make the calculation easy and leave it out.
3. This is the total you need to fund. Multiply this by 25 and you'll get the amount you need to have saved. In our case, $2.125m.
Your first year of retirement, you withdraw 4%, and you adjust up a little bit each year to account for inflation - so you'll be upping the amount you withdraw each year by something between 2.5% and 3.5%.
This should stretch your money over 30 years (your investments will still be growing during that period, of course).
It seems like a lot to save, but keep several things in mind. Odds are you'll get something from social security. If you have all your debts paid off, AND YOU SHOULD, pre-retirement, you can reduce your retirement income needs. Finally, if the financial leaders of this country continue to keep low inflation as a primary goal as they have for the last 25 years, we might not need to worry quite as much about the erosion of the value of our retirement nest eggs.
I wrote here about how to figure out what you need by setting a savings percentage goal each year and aiming for a multiple of your pre-retirement salary.
There's another simple rule you can follow based, instead, on what you want your retirement income to be: The rule of 25.
The idea is this; you need a sum of money that will last at least 30 years. So, figure out a sum of money that allows you to withdraw 4% the first year, and at least 4% each of the following years in order to give you the money you need.
1. Figure out your retirement income. Usually, you start with 80% or 85% of your pre-retirement income. Say you were making $100k/year when you retired, and you'd like to have $85k/year after retirement.
2. Estimate what social security (via your social security statement each year) and/or any pensions will give you. Subtract that from your goal, in this case $85k. Worried about social security or unsure about that? Make the calculation easy and leave it out.
3. This is the total you need to fund. Multiply this by 25 and you'll get the amount you need to have saved. In our case, $2.125m.
Your first year of retirement, you withdraw 4%, and you adjust up a little bit each year to account for inflation - so you'll be upping the amount you withdraw each year by something between 2.5% and 3.5%.
This should stretch your money over 30 years (your investments will still be growing during that period, of course).
It seems like a lot to save, but keep several things in mind. Odds are you'll get something from social security. If you have all your debts paid off, AND YOU SHOULD, pre-retirement, you can reduce your retirement income needs. Finally, if the financial leaders of this country continue to keep low inflation as a primary goal as they have for the last 25 years, we might not need to worry quite as much about the erosion of the value of our retirement nest eggs.
posted by Stephen Drone at
11:58 PM
1 Comments:
A Charles Schwab update:
"And Charles Schwab has an even simpler version: In "You're Fifty -- Now What?" he offered this formula: "It's pretty easy to get a ballpark idea of how much you'll need. To get a rough estimate, you can use what I call my guideline of 230K, which says for every $1,000 you'll need each month, you should have at least $230,000 invested when you stop working."
If you want to retire on $80k/year, that's $6666.67/month. So that's 6.7 (thousands/month) x $230k = $1.54m in retirement funds. I'm assuming that's if you do NOT retire early.
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