How much money do you think you’ll need to retire comfortably? This is an important question that nearly everyone needs to address. How do you estimate how much money you’ll need to retire comfortably?
To start, assume you’re married and that both you and your spouse are 57 years old. You plan to retire in ten years. Over and above your Social Security and any pension benefits you may be entitled to receive – approximately how much money do you think you’ll need to withdraw monthly from your retirement savings (before income taxes) in order to sustain your lifestyle?
Let’s say your additional monthly income need in today’s dollars (after Social Security and any applicable pension) is $3,000. Since you’re planning to retire in ten years, you will need to factor in annual inflation at 3%. You have now determined that your future additional monthly income need will be $4,032, not $3,000 ($4,032 = $3,000 x 1.349 compounded inflation factor). With a future monthly income shortage of $4,032, the annual amount you’ll need to withdraw starting ten years from today is $48,384 ($48,384 = $4,032 x 12 months).
Next, in order to calculate the capital sum you’ll most likely need to accumulate during the next ten years, divide your annual inflation-adjusted amount of $48,384 by 4.5%. A commonly used withdrawal rate used in the financial services industry today is 4.0%. Last year’s research by Morningstar suggested a starting withdrawal rate of 3.8%. The above 4.5% rate is meant to be used only as a guideline, not a hard and fast rule. Based on a 4.5% withdrawal rate, a good ballpark figure of how much you’ll need to retire comfortably is $1,075,200 ($1,075,200 = $48,384 / 0.045 withdrawal rate).
You may want to calculate (or re-calculate) your own number and jot it down on a piece of paper. Is the number you came up with realistic? Are you certain that your withdrawal needs are adequate? Do your calculations need to be adjusted?
You deserve a comfortable retirement. Now that you have a process to determine the capital sum you’ll most likely need in order to retire comfortably, relax and take a deep breath. You can do this! The question is, will you?
