The "how much to retire" rule of thumb is a calculation that has been done by actuarial models.
These conclude that the amount needed to buy a financially comfortable retirement is 12 times your final annual salary.
So simply if you earn $100 000 per year you will require an amount of about $1.2 million. However if you have a spouse then this multiple increases to about 15 times your final annual salary.
This multiple assumes that you:
- are completely debt-free.
- have no social security and that
- are self financing your retirement.
Although this estimate of how much to retire is an actuarial model based on a many diverse statistical averages it provides a target to aim at. Although many people manage to have a comfortable retirement on less than these amounts.
What is interesting, and for many people disturbing, is that to reach this target:
- if you start saving at 25 you need to save 15% of your current salary,
- if you only start at 35 the amount to save increases to 25% of your current salary,
- and if you only start at 45 you will need to save 47% to accumulate this same level of savings!
These percentages at age 35 and 45 are only useful for the shock factor.
If you were unable, or unwilling, to save when you are young there is very little likelihood you will start start saving at these levels when you're older. And it's a rule of life, unless you are one of the very few very disciplined savers, that the more you earn the more you'll spend.
So the key to accumulating enough money is starting young. The younger you start the easier it'll be to save yourself into a comfortable financial position. You'll really benefit from the power of time in compound interest.
Calculating How Much to Retire?
Many people mistakenly include the value of their homes when assessing their long-term savings. This is fooling yourself as you will need to stay somewhere when you are retired. Also, selling your home to rent exposes you to the fluctuations of rental levels.
Lets assume that once you retire, you would like to receive a monthly amount equal to 90% of your salary earned just before retirement.
You will probably be able to live comfortably on this amount because there are certain tax benefits and you will not have to save. In addition you will not have a bond and, if all has gone well, your children should be off your hands.
If your current pension savings are not on track to get to the how much to retire rule of thumb level then it will be necessary to look at other options during retirement. With the growing trend of living longer many pensioners will have to find ways of supplementing their income to delay drawing of capital.
If you achieve these multiples of savings you will be in good financial position. However based on the above assumptions and an annual real return of 3% you could deplete all your funds in 20 years of retirement. Although it would be possible to extend the pension period by reducing spending down to the level of say 70% of the final salary.
Every person should make a concerted effort to ensure that they provide adequate finance for their retirement. Just beware, don't fool yourself and underestimate how much to retire.
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