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How Much Money Do You Need to Retire?

For a long time, $1 million has been the standard milestone for how much money you need to retire. However, there are a lot of factors that this figure does not take into account. To help you better determine how much you will actually need, let’s take a look at some of the factors influencing your retirement planning.

How Long Will Your Retirement Money Last?

couple calculating how much money they need to retire

How long your retirement money lasts will depend entirely on your lifestyle and how much money you spend. For the purpose of this example, though, we’ll assume a conservative yearly expense of $50,000. If you have $1 million in savings and spend $50,000 a year, your retirement money will last 20 years.

The problem is that you may end up living well past 20 years of retirement. For example, if you retire at 65 with $1 million and spend $50,000 a year, you’ll be out of money by the time you turn 85. It’s entirely reasonable to assume, though, that you will live past 85, as many people these days are living into their 90s and even past 100.

To make matters more complicated, the $50,000 a year number doesn’t take into account inflation. If inflation continues at its current rate, $50,000 will not have near the buying power it currently has when it comes time for you to retire. For example, with inflation continuing at a 3% rate, in 20 years, you will have to spend a little over $90,000 a year to live a $50,000 per year lifestyle.

Factors such as these make it essential to carefully consider just how much money you are going to need. I suggest setting an optimistic number for how long you will live and a pessimistic number about how much inflation will affect the value of your money. After you’ve determined those figures, you can use a retirement calculator to see how much you need.

Once you calculate this figure, chances are it will be much higher than the $1 million goal that is often recommended.

How to Calculate How Much Money You Need to Retire

calculator and charts, to illustrate article how much money do you need to retire

For most people, discovering just how much is actually needed for a comfortable retirement can come as a shock to the system. However, even large numbers such as several million dollars can be reached with the right investment strategy.

To see just how big of a difference the right investment strategy makes, let’s consider a couple of examples.

Using a retirement calculator, if you start with $10,000, invest an additional $10,000 each year for 20 years, and achieve a 5% return, you will have $357,193 when it comes time to retire. Living a $50,000 a year lifestyle after 20 years of 3% inflation will cost you $90,306 a year. At this rate, you’ll be out of money after just four years of retirement.

Now, let’s consider the same example, except this time factor in a 15% return – which is the goal for Rule #1 Investing.

How to Reach Your Retirement Savings Goal

piggy bank, to illustrate article on retirement savings goals

Why do we use 15% as our benchmark for investing? It’s because investing in individual stocks can safely get you these returns when you follow these four investing rules:

  1. You need to understand the company that you’re investing in as if you owned it. Only invest in a company if you’re comfortable with owning the whole company.
  2. Ensure that the company has a competitive advantage that protects it from competition. We call this a moat.
  3. The company should have management that you can trust. Research the CEO or CEOs if the company has multiple leaders. They should be completely transparent to shareholders.
  4. The company should be on sale. You should never pay full price for a stock.

If you can check off all four of these boxes, then and only then can you buy the stock. These are the same criteria investors like Warren Buffett use and the same rules that allowed us to find companies like Southwest, American Express, Priceline, and Apple while they were on sale to achieve huge returns – returns that most people wouldn’t dream of.

Almost $1.2 Million – and Rising

Starting with $10,000 and investing an additional $10,000 each year for 20 years at 15% means you will have $1,188,000 – enough to last a little over 13 years. If, though, you continue to invest this money at the 15% rate post-retirement you will easily have enough to get you through the rest of your life with plenty of money to spare.

As you can see, how you choose to invest is key for saving enough to retire on. The simple truth is that 5% returns are not going to do the job. Instead, once you’ve answered the question of how much money you need to retire, it’s time to start figuring out how to achieve 15% or greater return rates in order to achieve that goal.

Related articles:

How to Set Retirement Savings Goals in Three Steps

The Easiest Way of Saving for Retirement

4 Easy Retirement Tips for Seniors

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  • Phil_Town_Rule_One_Investing_Profile_Image_230

    About Phil Town:

    Phil Town is the founder of Rule One Investing, a hedge fund manager, a two-time New York Times best-selling author, an ex-Grand Canyon river guide, and a former lieutenant in the U.S. Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.

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