Do you want to know how much it will cost you to retire early? If YES, here are 7 practical tips to help you determine how much money you need for retirement.
It’s never too early to start planning for retirement. You may think that you are young and still have enough time. But the truth is that time speeds so fast that before you know it, you are already a senior citizen.
It is therefore important for anyone to start planning for retirement from the very day that they start working. You might feel that’s way too early but the comfortable life you will live after retirement would thank you for it.
Perhaps, you have asked yourself “how much money do I need to retire early?” Well, in contrast to popular belief, there is actually no official retirement age especially when you are an entrepreneur, investor or business owner. You certainly do not need to work for 30 or 50 years in order to retire.
With the present state of the economy, the notion of early retirement is starting to catch the attention of majority as a sensible one. More and more individuals are now mulling over the question: “how much money do I need to retire early?”
Now, before you can put any effective retirement plan in place, you would have to figure out about how much you would need for retirement. Then you can devise a strategy to save up that amount gradually until you retire. These few steps would guide you in setting a safe amount to put away for retirement.
How Much Money Do You Really Need for Retirement?
Now in order for you to answer this question yourself, you need to first figure out the expenses you are expecting to have monthly once you retire. Most financial experts won’t advice you to work and work and save until you have a million dollar in bank.
If that was a realistic advice then 95 percent of seniors and retirees today would not be dead broke or dead. That’s a true fact! Long-established ideas about retirement are failing many people. Emerging financial experts now suggest that you make at least $5,000 of residual earnings per month while in retirement but it’s really not a standard.
So, you could be asking by now “how much money do I need to retire early?” “Do I either have to save a little more or less than a million dollars or produce around $5,000 monthly residual income?” Well, you need to first decide which one sounds good to you?
Which of it do you think you could likely achieve fast? To help you further, you should be aware that there are many sites on the Web that are offering assistance in determining how much you have to save so you could retire and keep your way of living.
However, some of these online calculators do not explain the logic behind the calculations being suggested. You could find it uncomfortable using these online retirement calculators. If you do so, it is advisable to just follow these simple steps to determine your retirement fund:
7 Tips to Help You Know How Much Money You Need for Retirement
1. Ask yourself “how much do I need at the present time?”
If you know how much you need today to maintain your lifestyle, then you can try to figure out how you much you will need to improve or maintain your lifestyle during retirement. Your current income will allow you to determine how much you are spending today and how much money you could likely need in the future. Calculate all your expenditures, bills and others that you think can make you use money.
2. Think 70 percent
First, you should know that when you retire, your annual living expenses would be around 70 percent of your current annual living expenses. Let’s assume you now spend $10,000 on feeding, housing, transportation and all the other important stuff every year, financial advisors are of the opinion that you would need at least $7,000 as your annual living expenses when you retire.
If you can save up to this estimated amount for the number of years that you expect to spend in retirement, you would be able to live comfortably. However, there some other considerations and exceptions to this rule which would be discussed as we move on.
3. Forecast your expenses
You need to take a look at your life and the activities that you are involved in right now to determine how much expenses you might be undertaking when you retire. If your kids are still very young, you already know that you would still need to deal with school fees in retirement. If you don’t have your own house yet or have a long term mortgage debt, you may still be servicing these debts in retirement.
Also, if you are not too healthy or are from a family that is prone to some genetic diseases, you already know that you would need to save a little extra for medical expenses. You also have to consider the lifestyle you plan to live in retirement. All of this would help you decide on a safe amount to forecast for expenses in retirement.
4. Factor in Inflation
Since today’s cost of living could be far different in the future, it is advisable to adjust your estimated retirement cost for inflation. Granted, you have saved $7,000 for each year that you are going to be retired, but unfortunately, the value of $7,000 today is unlikely to be the same in the next 30 years.
Inflation would have made the value of money to drop significantly. So you have to look into estimated inflation rates and use that to calculate what the value of the money you are saving now would be when you retire. For instance, you may assume a 3.5 percent average inflation rate annually. You can multiply that to your estimated current cost of living.
5. Multiply your inflation adjusted earnings by 25-: According to some reports, the safest withdrawal rate is approximately around four percent. You may calculate for your retirement needs by multiplying your inflation adjusted income to 25.
6. Length of retirement
This is like calculating your life expectancy but you can only guess, as there are no certainties when it comes to calculating how long you will live. First, you have to decide on what age or year you plan to retire and then calculate your life expectancy rate to determine how many years you are likely to be alive for after retirement. You can use online mortality rate calculators to determine your life expectancy rate.
7. Inheritance-: Of course, you want to be that nice parent or grandparent that leaves something in your will for your heirs or for charity. If this is the case, you have to think of how much you want to leave in your will.
As much as we love to plan our lives, it still gets a kick out of surprising us. Some unforeseen expenses will certainly surface, and you sure don’t want to be left hanging when they do. So, you have to make proper preparations for such expenses.
These are just some of the things you would need to spend on when you retire but you can also use an online retirement calculator to get a clearer estimate.
Once you have figured out how much you need, make sure you break down the amount into smaller amounts that you can start to save yearly. For instance, if you need $7,000 for each retirement year and you plan to stay retired for 30 years, you already know that what you need for retirement is about $210,000. And if you are going to be working for 20 years, it means you must have at least $10,000 saved towards retirement at the end of each year.
In conclusion, it is worth noting that the suggested steps do not consider all the small caveats that could be distinctive to your situation. The methods, however, do offer a good basis for your early or old age retirement planning.
Secondly, in my own honest opinion; I think it’s foolish and financially insane on your part to try to retire on savings. Don’t do it, even though it seems to be the safest option. Instead, work on growing an investment portfolio during your active years; so that you can live off the cash flow from these investments while in retirement. Some good examples of investment products that can yield steady cash flow and serve you in retirement include real estate, stocks of companies that pay consistent dividends, insurance, bonds, etc.
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