Retirement: How Much is Enough?
A Simple Formula
by Jake Robinson
Have you ever tried to figure out how much money you'll need in order to retire?
At least if you are like 58% of active workers, you haven't. That's right, 58% of workers have NEVER tried to calculate what they need to save for a comfortable retirement…
And “only 42% of active workers have ever tried to calculate how much they need… and 8% of those admitted they arrived at their answer by guessing,” reported National Underwriter on April 24, 2006.
That leaves you with almost a 60% chance of never doing this important homework…
but… since you are reading this, guess what? You are in the elite group who has at least put on their thinking cap…
So, let's figure out what you need
I use a rule of thumb to determine what Lump Sum of money it would take to generate $1,000 per month for my clients.
You would need about $192,000 in an account somewhere to give you $1,000 per month in income!
The factor is 16x the annualized amount to come up with the amount you need to produce your retirement income…
So, a measly $1,000 per month from say, a pension, is like someone handing you $192,000 in cash!
Here is the math: 16 x $1,000/mo x 12 mos = $192,000
I use 16 times as a nice round number, but the exact factor is 16.667
$192,000 x 6% = $11,520 per year in income... (The actual factor of 16.66 will get you to an even $1,000 per month which means you would need an even $200,000)
In my business ,we want to be conservative and draw 6% per year off of our Lump Sum to produce a monthly income without the fear of eating into the principle... any higher % is likely to dwindle your Pile and you may run out of money before you die...
There are good mutual funds earning more than 6%, so it would be feasible to maintain your income and likely grow it as your return may be closer to 10% or 12% in a good fund.
If you want an even simpler formula just use this rule
For every $1,000 per month in retirement money you want, you need $200,000 in cash invested at 6%. If you want $3,000 per month, multiply $200,000 by 3. For $3,000 per month in retirement, you must have $600,000 invested.
Although the information above may give you heartburn when you discover your retirement lifestyle is starting to look like the Grapes of Wrath, there are some other factors that can reduce the ultimate Pile you need.
Maybe you will receive Social InSecurity. Unless you are within ten years of receiving age. don't put a lot a faith into it. But if you receive any, well, this reduces the Pile you need by a bunch.
You may be in line to receive some pension money on a monthly basis.
You can get way more complicated and try to figure out the absolute minimum you would need to give you just what you need monthly in order to just run out of money at the moment of your death. You could, but be careful. Don't live too long
(at least not past your Life Expectancy).
Use this formula as a guide to see if you are anywhere in the ballpark of where you should be. If not, you have some work to do.
The next step is to accumulate this Pile. This is another subject that should be covered in its own article.
|©2008 Jake Robinson Used by permission.
Jake has been helping people make good decisions with their money for more than 12 years. You may ask questions about your retirement by contacting him at 615.713.1008 or by filling in the form below...