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How Much Money Do I Need to Retire and Why

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by: miguelcarlos
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Word Count: 506
Date: Sun, 8 May 2011 Time: 5:52 PM

Have you ever asked yourself this question at least once in your life, "How much money do I need to retire?" Many of us have already pondered this question at least once in our lives. I, for myself, have yet to answer this million dollar question for the fear of not able to save enough for retirement. Honestly, I dread retirement since I only have a small amount of money saved up. However, there are steps and tips that all of us can follow in order to come up with a sum of money that can give us a comfortable retirement life.

There are many factors, such as when you plan to retire and how much you would like to spend. There are a few simple calculations that might help to give you an idea. There are 4 rules that can serve as a guide on how to calculate the retirement money that you need.

a. The 4% Rule - This rule says that you can withdraw 4% from your account in the first year. Then in the succeeding years, you withdraw the same amount plus the adjustment for inflation. This can allow you to decide if your savings are enough to cover your desired income level in retirement.
b. The Rule of 20 - This rule suggests that for every amount of annual retirement income you would like, you would have to have saved up 20x more of that.
c. The 10% Rule - This rule tells us to save 10% of our gross income towards retirement. This will give us a retirement income equal to what we are used to now. However, the later you start saving, the higher percentage you might need to put away.
d. The Rule of 72 - This rule will tell you how long it should take to double your money. The calculation for this rule is you divide 72 by your expected return.

The rules have been set. Now all you need to know about is how to determine how much money you need to retire based on the cost of expenses that you will have. Again, there are 4 guidelines that can help you.

a. Estimate your retirement expenses. You must think of how much money will you spend in each year in retirement. This includes an estimate of your taxes, expenses for food, medical expenses, travel, etc.
b. Figure out how much retirement income will come from guaranteed sources. Income from guaranteed sources include pension, social security, retirement benefits, etc.
c. Calculate the gap between how much money you need to retire and the amount provided by the guaranteed sources.
d. Factor in inflation and life expectancy. Variables like your rate of return on investments, life expectancy, the affects of inflation, and your willingness to spend principal will all have a big impact on the amount of money you will need to retire. To account for these variables you will want to develop both a best and worst case scenario.