Retirement is a number, not an age
You may have heard this before, but what does it really mean? Simply put, it’s the number you need from savings and investments that can sustain you for the rest of your life—financial freedom! Will that be accomplished by the age you’ve earmarked? It may be later—it may be earlier! As mentioned in the last article, first consider all other sources of income in retirement (e.g. social security). Then determine your gap need. This will help you arrive at your personal retirement number. Your nest egg!
How big should it be?
So I know my monthly gap need now, but how do I figure out the big fat number that will generate it? No matter your approach, it will always be just an estimate. But there are two general approaches, or rules of thumb, that we might choose to for that estimate (and there are others). None are without their flaws!
The $1000-a-month retirement savings rule
(CFP and author Wes Moss) The rule says that with every $1000/month you want to have at your disposal in retirement, you need to have $240,000 saved. I like it because it’s simple—the math is easy! But it has its shortcomings, in both directions. It’s conservative in that it considers NO earnings on your nest egg. But aggressive in that it withdraws 5% annually and is estimated for only 20 years—we should probably plan for at least 30 years.
The 4% rule for retirement withdrawals
(Financial planner William Bender) You’ve probably heard of this one because it’s been around for awhile. It was out of fashion recently with the market downturn, but is looking pretty good again. It assumes a 4% withdrawal every year, adjusted for inflation. It should last 30 years if our investments are a 50/50 mix of stocks and bonds. If you use this rule, the easiest way to estimate your target nest egg is to simply multiply your yearly income need by 25.
There are other approaches too. You can start with simply using the online retirement savings and/or withdrawal calculators. I like Bankrate’s Retirement Calculator. And NewRetirement has a great, free planning tool that factors in more complexity. The subscription plan is even more powerful.