If you’re in the dark about how much you’ll need in savings/investments for retirement, you’re not alone.
Juggling an unknown life expectancy, medical expenses, surprise big-ticket items, and being in an environment with unpredictable inflation and interest rates is a daunting task.
And most don’t have a clue how much they’ll need to survive it all – much less thrive – during their golden years.
But there may finally be a simple way to accurately estimate how much you’ll need.
It’s a one-size-fits-all system that allows you to lock in a good estimate and track your progress.
It’s called the “back of the envelope” system, and it goes like this…
Estimate what you plan to spend annually in retirement, and use that number to start. If you have no idea, assume 80% of your current income.
We’ll use the 80% method here and assume $100,000 in income. So we’re starting with a figure of $80,000 per year in total income in retirement.
Now subtract from $80,000 whatever you estimate your Social Security benefit will be. Let’s use $35,000 per year in Social Security, leaving you $45,000.
Next, multiply that number – $45,000 – by 25.
According to the developer of this system, that’s how much you need for retirement.
For this example, you’ll need $1.125 million to maintain your current lifestyle – and you’ll need to withdraw 4% annually without running out of money.
That said, I am not completely onboard with the 4% rule.
It is a little too inflexible for me. When you consider the fact that our spending declines as we move to our later years in retirement, I would prefer to see a sliding scale that reflects that trend.
But that’s for another time.
If you haven’t yet reached your goal, and you’re still accumulating assets and cash, the rule of 72 is the best way to track your progress.
