How much do I need to retire?
One of the issues we all face is trying to plan, figure and calculate how much money we need to retire. We try to save all our lives but when we get close to retirement, how do we know we will we have enough? The answer is, we never know. We are not sooth-sayers, fortune tellers, or divine entities, but the good thing is we can be mathematicians because it is the math that can tell us with almost complete certainty that enough is enough, and it isn’t all that hard.
A very interesting psychological event occurs when one is about to retire. Panic. We have been saving for years, piling up money. Now, not only will we not be adding any more to that pile we have been trying to protect for decades, we will be diminishing it day by day, month my month, and year by year. We wonder if it will be enough. Will last as long as we do. Our investment which has been mostly traveling in one direction for many years, will now completely reverse course and likely go the other way. That is vary scary, and one of the many anxieties retirees face. Completely reversing field and wondering, panicking, if there will be enough to last.
Keep it simple
A simple method is this: No matter what age you are, multiply your annual income need by 25, and if you have that amount in assets, you have enough to retire. We could use complex inflation adjusted calculations to impress you, because the reality is indeed that your need will change, very likely increase, but your investments are not isolated in an inflation-proof vacuum. They should and likely will increase as the economy inflates.
Lets keep this simple. The retirement asset goal is 25 times your annual need.
A - First estimate all of your expenses, including income taxes.
B - Next, add all of your lifetime income that will be automatic. If you have a
defined benefit pension plan which pays for life, social security income, maybe you have rental property income after expenses, whatever guaranteed income
you have when you stop working, that is the number.
C – Subtract B from A.
D – Multiply C by 25.
Example: You need $100,000 every year to live the way you want. You have expected social security income of $40,000, no defined pension, but rental property that pays $30,000 after expenses. So you can count on roughly $70,000 in annual income in retirement before you have to raid your retirement assets.
That leaves $30,000 you must provide for yourself for a comfortable retirement.
$30,000 multiplied by 25 is $750,000. In this case, you would need $750,000 in assets to retire comfortably.
Withdrawing $30,000 per year adjusted for inflation, will provide income for about 50 years.
How does the math work?
If you earn only 4% on your money, the multiple of 25 provides all of it without drawing principal. So $750,000 will earn $30,000 at 4 percent, and last forever if nothing changes – but some things will change. This multiple does not include any need inflation adjustment – because it doesn’t have to.
If you earn nothing, your nest egg of $750K will be depleted after 25 continuous years of withdrawing $30K, which is the duration of a fairly long retirement.
Using this simple formula, because your retirement assets will be earning something, they will likely last somewhere between 30 years 40 years depending on how much more than the inflation you are able to earn. Don’t worry about outliving them.
Should your portfolio out-perform inflation by about 2%, it should last close to 40 years. If it does better, more, if less - 30 years is the low end.
What about taxes?
Taxes certainly can be a problem. We originally calculated our annual need before tax so that it is included, but taxes can change, they can get worse. This is why we use the multiple 25 years rather than 20 or 15. 25 years should be enough to absorb most inconvenient nasty surprises from additional taxation, unwanted expenses or inflation erosion.
There is no guarantee in life. You could find that 25 times your annual need won’t be enough for you, but given most of the likely financial scenarios we face, it is a good and solid formula, even a little on the high side. We have seen inflation reach scary heights in the early 1980’s and we’ve seen it low. You might need much more money in the future than you do now, but your balanced investment portfolio should be able to keep up and absorb most of that danger by responding with greater gains or additional income by employing simple diversification methods described here on this web site.
If you retire later in life, your annual income multiple could be 15, or even less. We try to make it logical and reasonable. A multiple of 15 probably would last 17 or 18 years maybe as long as 20 years if you get lucky, but it won’t be enough if you retire at age 60 and expect to live to be 95.
So, - if you are stuck for a number to target for your retirement goal, – multiply what you need by 25, hit that mark, and you should be able to live a long and financially stable retirement.