How much money do I need to retire?

Planning budgetAre you saving enough to retire? That depends on how much you need to have when you enter retirement. Last time I showed you a spreadsheet to help one of my clients amass $2,000,000 by the time he retires. But will that be enough? We can build a simple spreadsheet that gives you a start on answering this. Let’s start by figuring that he’ll need about $50,000 a year. The rule of thumb is you’ll need 70% of what you earned while working, but I’ve talked to many retirees who say that’s not nearly enough. It depends on your retirement plans. Will you downsize or will you spend your new-found time in travel or other costly pursuits? The idea of this spreadsheet is to help you visualize the relationship between how much you spend and how long the money lasts.

He’ll want to invest cautiously to avoid losing his nice nest egg. (More about that in a later post.) Let’s say he averages 4% growth a year. He’ll also find that his spending will go up each year due to inflation. Figure 3% for that. Let’s say he retires at age 65. Of course, you can change any of these assumptions and see what happens.

Here’s the spreadsheet, retirement spending

retirement spending xlsAs you can see, this is a good spending plan. He’s not expected to run out of money until he’s 115.

Maybe he can spend more. If he spends $100,000 per year (try it), he’ll run out at age 87. It helps to play what-if with this until you get something that feels comfortable. A common rule-of-thumb is to spend 4% of your nest egg the first year. In this case, that will be $80,000 a year and it will cover him to age 92.

You’re your own financial advisor, even if you’re working with someone else. Only you can decide where you want to be in the future and how much risk you’re willing to take. A spreadsheet like this doesn’t give you a single answer; it helps you visualize your options. It often raises more questions than it answers, and leads you to the key issues. Will I need to work longer? How long might I live? Do I need to increase my retirement savings?

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