The general take on retirement is that we need to have a million dollars. We hear it in the media, we see it on the news, we read it in the finance books. But from your own personal perspective, do know how much you really need to retire based on the things you want to do with YOUR life? Let's talk through this a little bit.
"Do know how much you really need to retire based on the things you want to do with YOUR life?"
How much do you think need to retire comfortably?
Let me ask a different way - If you were to think about things on a monthly basis, how much money would you want to have available to spend a month in order for you to feel comfortable when you are in retirement? (Assuming today's value of money).
This monthly amount should include things like your living expenses, travel, fun, eating out....basically the cost of all the things - your essentials plus fun - that you'd like to be able to afford for a full life when you are retired.
First - Think of how much you'd need to live on comfortably on a monthly basis in retirement
Keep in mind many retirees who can afford to, never really retire 100% because they get bored and so they usually have part-time jobs or businesses. So when you think of that monthly amount, consider that you may have additional income coming in from a job or business. (I'm assuming here that you are already planning for retirement and will have the luxury of choosing whether or not you still have to work).
Take that monthly amount you've decided on and multiply by 12 so you know how much you need each year. So for example, let's say you decide on $5,000 a month multiplied by 12 months that's equal to $60,000 a year that you'll need to live on comfortably (let's also assume this number is after taxes).
Then take that $60,000 and multiply it by 20 years, which is the average length of retirement, that will give you $1.2 million dollars. This amount is how much you'll need to save for your retirement. In order to make sure you are factoring in taxes, you'll want to add on a tax rate of at least ~25% to this so you can cover your annual tax bill when you start to make withdrawals. This would bring the amount you'd need to save to $1.5 million before taxes. FYI - Your annual tax rate will depend on how much you withdraw as income from your retirement accounts.
Second - Once you know your retirement number, and you project what you are saving now into the future, are you on track?
To determine this, You also need to find out how much you should be saving on an annual basis to ensure you meet your long-term retirement goal.
Your calculation will, of course, need to factor in inflation and a good retirement calculator like this one can help you with that. Looking at things this way helps give you perspective on how much you need to save. This exercise is not to scare you. It is to motivate you to create or adjust your long-term savings and investment strategy.
The good news, is that you don't have to save every single dollar for retirement if you contribute consistently to your retirement account and invest your contributions. Investing over time will allow your money to compound and gain returns which means your money is at work and growing for you!
Time is one of your greatest assets and while you have it on your site you want to get to work building long-term wealth by -
- Creating a plan to pay off debt
- Building an emergency fund
- Contributing to retirement
Remember, the only way you can get ahead is by getting started.