Ask Dave Ramsey how much money do you need to retire comfortably, 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.
There’s a peace of mind that comes from knowing where you are and where you’re going.
The Big Takeaways…
- There’s no single amount that people need to retire comfortably, and it’s important to consider the lifestyle you want in retirement versus what you need to get by.
- The earlier you calculate what you have (and what you want), the better you can plan for the retirement that you want.
You can quickly project your net worth into retirement using the NewRetirement Planner.
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.
If you want to see the world, you’ll have to account for that in your retirement income projections.
To figure out how much money do you need to retire comfortably, you need to project how much you will spend on your retirement needs and wants.
Needs: 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. What will you need to spend money on?
Wants: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? What will you want to spend money on in retirement?
Each of these questions, and more, play a role in determining how much income you will need to retire comfortably.
The trick is to get really detailed about your future and determine exactly what you need to retire comfortably. The NewRetirement retirement planner makes it easy to document future spending — you can even set different levels for different phases of retirement. Or, browse 9 Tips for Predicting Retirement Expenses.
In addition to predicting your retirement spending, to determine how much you need to retire comfortably, you will want to figure out what you have now — how much you earn, how much you save, how much you have invested and more.
A detailed and comprehensive retirement calculator makes it easy to calculate what you have. The NewRetirement tool 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.
The sooner you start planning, the more likely you’ll be to meet your goals.
Projecting how your current assets will hopefully grow to and through retirement is critically important. The NewRetirement retirement planner let’s you see your projected net worth for every year of your life.
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.
Beyond how your savings will grow, it’s also a matter of knowing when you want to retire, how long you will live and how much income you will have from all sources, including Social Security.
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.
To find out exactly how much YOU need, use a comprehensive retirement planner that let’s you create a highly personalized and detailed plan. The NewRetirement retirement calculator is an easy to use tool that puts you in the driver’s seat for all of the inputs. Forbes Magazine calls it a “new approach to retirement planning.”
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.
*Editors note: 12% is a VERY aggressive assumption on long term rate of return. Long term stock market returns for US large cap stocks have been about 7% after adjusting for inflation.
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 might need. And if you use NewRetirement’s retirement calculator, you can get started toward that goal today.