Ask Dave Ramsey how much you need to retire, and you’ll probably get the same answer he has given many times before: It depends. That might not seem helpful at all, but of course there’s more to it.
Just as no two people live the same lifestyle with the same income, no two people will retire in exactly the same way. One couple might be perfectly comfortable, says Dave in his answer to one caller, with a retirement annual income of only $20,000. However, a single person might just as easily need triple that.
What’s the difference? It’s all about what you want. Here’s how to sort it out and get started on your path toward retiring with the lifestyle you want.
Determine the Lifestyle You Need
Do you own your home free and clear and do you have zero debt? Chances are you’ll need a lot less annual retirement income than someone who still has a mortgage and debt to pay off.
Do you want to travel the world, dine out regularly, buy a new home in a retirement community (or one at the beach) and feel free to buy what you want, when you want it?
Each of these questions, and more, play a role in determining how much income you will need when you retire. It’s a matter of knowing when you want to retire, what you will want and need to spend each year after retirement, and how much income you will have from all sources, including Social Security and disbursements from your investments.
Get a Snapshot of Where You Are Now
The best way to learn what you need is to use a retirement calculator to determine where you are now, and where you are headed. New Retirement’s calculator can help with that. You enter your information, such as how much you earn now, how much you save, and how much you have invested, and the calculator reveals what you’ll have when you retire by a certain age.
One of the best things about using a retirement calculator is that it puts you in control. When you see where you are now, you will also see where you can make adjustments to save and invest more, retire sooner, retire later, cut expenses, among many other choices.
Ramsey also recommends using an investment calculator. When you invest for the long haul, a calculator lets you reasonably predict what your investment will be worth in a set number of years. If that seems hard to believe, remember that with all of its ups and downs, you can still count on an average rate of return if you leave investments alone to grow.
Calculate What You Will Need
Once you know what lifestyle you want and where your current savings and investments stand, then you can calculate what you will need to retire. Dave explains that if you want an annual retirement income of $40,000, you’ll need about $500,000.
That’s a lot of money, but it gives you freedom. What you’ll get from that $500,000 is a nest egg that does not reduce. You’ll receive your $40,000 in disbursements; it won’t reduce the amount you have invested. So in theory, your retirement income would come from what your investment earns, not from the investment itself.
The bottom line is that you can use a formula to figure out what you need to have invested for the long term. Using the amount that you will need as an annual retirement income, then divide that number by .08. That gives you a dollar amount to aim for as your nest egg.
Maybe you want a retirement income of $100,000 a year. That means you’ll need well over a million in mutual funds with an annual return of about 12 percent. And as Dave explains, 4 percent of that covers cost of living increases. If you want an income of $50,000 annually, your nest egg should be around $625,000.
Determining what you need to retire isn’t a matter of looking at a chart. It requires factoring in your earnings now, how much you save, how much you invest, your rate of return on those investments, and what kind of lifestyle you want after retirement.
Using Dave Ramsey’s .08 calculation, you’ll have a better idea of how much you really need. And if you use New Retirement’s retirement calculator, you can get started toward that goal today.