A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Wednesday, January 19, 2005

How Much Do You Need During Retirement?

For many people, one of the scariest aspects of retirement planning is figuring out how much money will be needed to fund a comfortable retirement. After all, nobody wants to work their entire lives, retire, and then have to live on a shoestring. So, how much is necessary to support a comfortable retirement.

If retirement is far off, estimating how much you will need is difficult to estimate. One rule of thumb is to assume you will need what you are currently living on. So, if you are living on $50,000 now, you will need or want $50,000 (in today's dollars) when you retire. Here is an illustration of the effects of inflation on the amount that will be necessary during retirement, assuming the desired income is $50,000 in today's dollars and the income will be needed in 30 years.

                      Num of    Actual

Income in Inflation Years to Amount
Today's $ Rate Retirement Needed
$50,000 3.00% 30 $121,363
$50,000 3.50% 30 $140,340
$50,000 4.00% 30 $162,170
$50,000 4.50% 30 $187,266

As you can see, inflation plays a significant roll in retirement planning. Failing to factor in the effects of inflation can be devastating to a retirement plan.

Once you have figured out how much income you desire during retirement, you can then estimate the size of the nest egg you will need to fund that particular income need. So, if you need an income of $121,000 in 30 years, and you want to withdraw no more than 5% of your nest egg, you will need $2,400,000 (121,000/.05 = 2,400,000).

Now, why did I say that you don't to withdraw more than 5% from your nestegg? Because, you don't want to run the risk of eating into your nest egg. If you have your portfolio (or nest egg) allocated so that you can grow your money at 8% per year, you can take out 5% and not eat into your nest egg and still have a 3% cushion for inflation.

We'll talk more about this topic in the future. Until next time...