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How Much Money Do You Need to Retire

Piggy bank with coins

How much money do you need to retire? The answer is different for everyone, so it’s not simple answer. For someone who is frugal and plans to keep working on the side, they probably don’t need very much. Someone else who is used to making $250,000 a year on an executive salary and doesn’t want to downgrade their lifestyle is a bit different.

With that said, there are some general rules to follow. Here are the main ones to keep in mind as you set your financial goal.

Retirement Financial Goal Tip 1: Remember 80%

Most experts recommend you aim to replace about 80% of your current income with investments. So if you currently make $50,000 a year, you would need $40,000 (which came from 70% * $50K) per year in retirement. 

That’s a ballpark. If you plan on living frugally, maybe you can get by on just 70%. Or if you plan to travel a lot and expect to have a lot of higher expenses, you might need to replace 90% or 100% of your current income. 

For most people, 80% is a good number to start. So if you decide you’ll need $40K per year and it needs to last for 15 years, you’ll probably need about $600,000. There are a few other things to consider though. 

Retirement Financial Goal Tip 2: Consider Rising Costs

Everything is getting more expensive. Cars, college educations, loaves of bread - it doesn’t matter. Wise investors account for the fact that things will keep getting more pricey over time. 

If costs go up about 3% each year, it doesn’t feel like a big hit. We generally don’t notice if our bread goes up from $1.50 to $1.55. Even if you look at something a bit more expensive like clothes, we may not notice an increase of $50 to $51.50. Those types of increases just don’t scream for our attention.

But it makes a big difference over the long term. A 3% annual increase due to inflation leads to an overall increase of almost 56% after 15 years (1 + 3%)^15.) That can make a big dent in your retirement plans if not accounted for. 

So while you may be able to retire for just $40,000 today, expect your costs to go up by about 3% each year. 

Retirement Tip 3: Expect the Unexpected

The sad reality of retirement is that unexpected things happen. Your car breaks down and you need major repairs or to replace it. Your dog needs surgery and suddenly you're stuck with a $4,000 vet bill.

You get hurt or sick and end up with a hefty medical bill.  These things happen all the time - it’s just a fact of life. Wise investors realize this and will put aside extra money to help deal with these “surprises.” This money should be fairly liquid, but should still be working hard for you. You don’t need to invest it into a savings account that pays an abysmal 0.1% interest on your money. Consider investing in a money market fund or conservative bond fund that you can quickly sell if the time comes. 

Have any other questions about how much you need to retire? Give us a call at (714) 663-8000. We look forward to hearing from you! 


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