Planning how much money will be needed to retire comfortably in the future is one of the most difficult things to do financially. There are so many factors included, like what will the inflation rate be over the next 30 years, how will your income change, will the stock market have several more declines along the way, what will happen with social security and pensions. No one can predict the future, but without trying to have a ballpark figure of how much you need, you are just about guaranteeing that it will either be a struggle when the time comes or you will be working a few more years than you really want to!
After researching articles we have found what is called the 4% rule for retirement. Basically through research this says if you withdrawal 4% of your retirement savings a year you have a 96% chance of not running out of money in 30 years. We have been tracking our income and expenses for several years now and have used those numbers to develop and number that we think we will need for retirement. Over the past three years our expenses have ranged somewhere between $60,000 and $75,000 dollars a year. Those expenses should drop some now that we are no longer paying on a mortgage and auto loan. If our expenses continued to be in this range we can now use the 4% rule to give us an estimate of how much we would need to continue spending this amount a year.
Retirement Number Calculation:
$60,000 / .04 = $1,500,000
$75,000 / .04 = $1,875,000
So, to be able to continue spending between $60,000 and $75,000 a year for thirty years you would need to save between $1,500,000 and $1,875,000. These are pretty daunting numbers. The good news if hopefully you will receive some social security or pension benefits that will reduce these numbers. For example if you were wanting to continue to spend $60,000 a year in retirement and you would receive $15,000 a year from a pension your new calculation would be:
($60,000 - $15,000) / .04 = $1,125,000
Now your number needed has dropped to $1,125,000 if you include your pension payments. Social Security could also be added into the calculation. We are not including Social Security and pension payments into our plan to be a little more conservative. The income we receive from those sources will be a cushion on top. We have decided to make our goal $1,600,000 and we have 22 years to get there. The numbers are very large and we know people that have managed on far less. This is just a goal we have set for ourselves to try to reach. One thing we are proud of is along the way to paying off our debts, we have also been able to save towards our retirement.
The one thing that is difficult with learning about money is it has always been a hush subject. People don't think your personal finances should be discussed. Growing up in my family it was always "don't worry about it" or "its none of your business". Most people going through the public education system are usually only taught how to balance a checkbook with little or no education about the stock market. You are basically just thrown out to figure it out on your own. We have just been lucky enough along the way to meet some people that would discuss finances and some of the things they had done in their lives to get where the were. This is why going forward we would like to start tracking our progress towards our retirement number quarterly and show what we are doing to reach our goals. We are so appreciative of some of the people that were there early to teach us, which has helped to get us where we are today.
