How Much Do I Need to Retire?
This seems like a very simple question that everyone needs answered. Accounting for inflation, average rate of return after retirement and the standard of living to maintain after retirement, the question becomes very difficult to answer.
In short you need a LOT of money. A million dollars in today’s money will not be enough for most people. Consider that taxes will be paid on money withdrawn from retirement accounts, property taxes will need to be paid, car payments will be made, vacations will be taken, gifts will be given and don’t forget the daily living expenses. Instead of having two days off a week with two weeks of yearly vacation, there will be no job to prevent spending money on personal entertainment. All day, every day will be free to fill with activities, and of course spending money is a great way to spend time.
A simple example should help drive home the point. With a million dollars in the bank, withdrawing $80,000/year to live off of, earning 8%/year on the remaining account and assuming a 4% inflation rate, how long will that retirement account be funded? The headline reads BROKE BY EIGHTY-FIVE! That may be enough… or not.
Let’s take another example. After retirement, you will live forever. How much money can you spend each year? Now this is an easier question to solve for, and you can do it in today’s dollars, making it easy to understand. Take the Retirement Account Value x Rate of Return x (100% - Inflation ). So $37,000/year! How is that trailer park looking?
That number happens to scale. Need $74,000/year to live on? You need $2 million in the bank. Need $111,000/year to coddle yourself? Simple, have $3 million lying around when you retire.
But the catch is, that $3 million is in TODAY’s dollars. What is that going to be tomorrow? Preinflation Retirement Amount x (100% + Inflation ) Years to Retirement
Taking $3 million, assuming 4% inflation and a retirement date 30 years from now, you need $9,730,192.53 in the bank.
Sweet, $10 million in the band and call it done right? As long a nice steady 8% can be guaranteed, yes, perfect. Nice, steady and percentages usually only exist in theoretical calculations. There needs to be a buffer and calculating the buffer is more complicated than the simple math used here. The better idea would be to build a buffer into the retirement budget. But your first concern should be building up $10 million in the bank, so you can retire in style.