How Much Money Do I Need to Retire?

How Much Money Do I Need to Retire

Whether you’ve just started earning or you are in the midst of your career, this is a question that might have lingered in your mind every now and then. We’ll try to answer the question and make things simple for you in this post.   

Every individual is working hard in this world and earning money. Our financial goal remains the same i.e. to fulfill our needs and desires. However, there comes a stage in our life when it’s time to bid adieu to our professional life and retire. Post retirement, we don’t have any regular source of income, but we wish to do everything that we couldn’t during our working days. For that, the regular flow of finances is essential. Some employees do enjoy pension benefits from their company. But at times, even it’s not sufficient. So, you need to save money in the present and invest it properly to retire with peace of mind. That is where you need retirement planning. 

Retirement Planning: What it is and why it is important?

Retirement planning is the determination of the actual income/cash flow needed after ending the normal salary cycle for an employee. It includes various steps such as recognizing various sources of income, identifying different types of post-retirement and daily expenses, estimating net savings, and implementing broader savings and investment plans. 

What is Retirement Planning?

Retirement planning is not the only financial forethought, but it includes other preparations for a better life after retirement. The planning of savings, investments, and distribution of the money is a critical aspect for sustaining one’s life after paid work ends. 

Here, implementing a few savings and investment methods will not be sufficient for a full-proof retirement plan. Rather, one must keep a strict eye on lifetime assets and liabilities. Moreover, future cash flow estimation and subsequent planning are necessary. 

Significance of Retirement Planning

Planning for retirement is crucial for enjoying retirement to the fullest. It is also essential to support your family even after you have retired. Your family might face some financial woes in the future. So, you must be well-equipped for that. Furthermore, there are way more things to complete before you get old. Here, finances play a key role and allow you to retire with peace of mind. 

Help your family at the time of financial crises

Well, economic situations can change anytime. Even though you are quite wealthy, your life status can change in a fraction of a second. So, if you don’t wish your life to go upside-down, then planning a retirement policy is mandatory. By planning for retirement, you are indeed securing your future.

It’s impossible to work for a lifetime 

No matter you are earning an annual salary in millions, your future is never secured. It’s your investments and saving that can hold your back. 

When you’ll cross the age of 60 or 65, you wouldn’t be able to work like now. So, it is crucial to think about yourself and your family at that time. Your kids might earn well, but you eventually cannot depend upon them forever. Hence, if you don’t wish to feel unemployed at that time, then preparing a retirement plan at the moment is necessary. 

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Fulfill your wishes with your retirement money 

Everyone has some or the other retirement plan. It consists of things we want to do and desires we wish to fulfill. So, preparing for a retirement plan is an absolute necessity to ensure the availability of funds to fulfill all our desires. 

How much do I need to retire: Calculation of savings

Though it is quite difficult to calculate the exact amount of money to retire, there are some hit-and-trial methods and formulas that give approximate values. Let’s now have a look at various calculations that will allow you to find the amount that you need to retire peacefully!

Calculation based on chosen lifestyle and expenses

The nature of future expenses helps in computing the retirement amount. The monetary expectations of individuals are different and vary according to the chosen lifestyles. So, a person should predict monthly/yearly expenses based on the kind of life he/she wishes to indulge in. Furthermore, the medical expenses should always be added to the value. 

As a thumb of rule, it is expected to save assets equal to 70-80% of the pre-retirement income. This amount is required for leading a healthy and good lifestyle.

There is no such well-designated formula for the calculation of the actual amount of money one would need after retirement. However, one needs to keep in mind the following steps for calculating the lump sum amount needed after retirement 

  • A person should first compute the current expense and then, by applying the mathematical formula for extrapolation, the current expenses should be extrapolated for the remaining years of retirement life. 
  • After that, inflation should be predicted and factorized with the monthly expenses until the remaining years of retirement life. 
  • A guess should be made about the total years one will survive in retirement. With inflation and predicted retirement years in hand, the expected expenses can be calculated. 
  • The last step is to make adjustments in the predicted monthly expense after retirement. Personal expenses should be added along with medical expenses according to the medical history of that individual.
  • Keeping in mind the inflation and substantial changes in circumstances, this calculated expense must be revised. 

Calculating for Retirement Savings with Age

The retirement savings can be calculated on per month or yearly basis with the correct exponential of age. A person should know the amount needed to be saved for the post-retirement plan at every stage of life. 

There are two such rules which can be beneficial for this calculation:

15-25-50 Rule

This rule estimates the amount of money that needs to be saved after retirement based on an individual’s current age. If a person starts the career life at the age of 25, he/she should contribute 15% of the monthly income towards savings and 50% of gross income should be invested in a fruitful venture that will yield high returns. 

Multiplier Rule

According to this rule, a person has to either save or invest 25% of the monthly income for retirement. This percentage may increase exponentially if the career is started at an elder age than 20 years. The percentage may seem daunting at first, but eventually, this is one of the best formulae for easy calculation of the net monthly retirement income.

Calculation based on Retirement Income Goals

It is important to know the amount of money a person needs to save on a monthly and yearly basis to achieve future goals. There is a general thumb rule for that, which ascertains ‘to confine the retirement income and withdrawal to 4% of the total annual investments in order to achieve the retirement income goal’. This rule has its limitations; however, this is a great formula for predicting the net savings needed per month. 

Sometimes, individuals may have different sources of additional income such as social security benefits, various pension schemes, and income obtained from renting. This income must be added to the savings. Therefore, this amount can be estimated and deducted from the net savings made per month. 

If you wish to retire peacefully, you should not save money in a personal savings account. It is a better alternative to open any brokerage account such as a post-retirement account and a health savings account. The return paid for a savings account is much lower than the value you’ll receive from any of the brokerage accounts. Furthermore, some taxes need to be paid on savings in post-retirement accounts. It is therefore important to pay the taxes when savings are being made rather than when withdrawing the amount during retiral. 

Don’t just save your money, let it grow 

Well, if your retirement goals are concerned with saving the money for kids, then you need to correct it. Savings don’t grow your money. Instead, you should stress on investing in order to grow your money. You should look for different investment options offering high ROI. It is a great option to choose plans that offer a good ROI until the time you have crossed 95 years of age or while entering your 100s. Such plans cover your regular living needs as well as offer some death benefits. 

You can start with retirement plans from the age of 18 and you can take it up to your desired years. However, if you start going for it in the early days, you can expect a substantial amount. 

For instance, you began investing money on your retirement policy of 2,000 USD per month for 50 years when you were just 20 years old. Then, with time, your payment will get accumulated, and you will get ₹1,200,000 on the day you will get retired, i.e., when you will be 70 years old. 

Final Words

There is no fixed formula for the calculation of the total amount of money to be saved for retirement. However, there are some theories and postulates to guide through the retirement planning process. The emphasis on financial planning for retirement changes throughout the life stages of a person. During the early stages of a career, a person focuses on setting aside some money for retirement. Next to this phase comes the career peak when an individual tries to invest more and acquire a huge amount of assets. Once the retirement phase starts, all the assets and incomes retaliate towards distribution. If you wish to retire peacefully, then you should invest your money in the right places such that you can accumulate immense wealth for your retirement.  

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