Well as you can imagine, the amount of money necessary to retire can vary from person to person. It depends on the lifestyle you want or you have grown accustomed to.
The general rule of thumb is the “4% rule,” which suggests that you should plan to withdraw 4% of your retirement savings in the first year of retirement and adjust the withdrawal for inflation in subsequent years.
As we all know with inflation as high as it is right now. This general rule of thumb may not make as much sense. But here are the historical averages of inflation for the last twenty years.
During the observation period from 1960 to 2021, the average inflation rate was 3.8% per year.
If you have your money in a solid index fund, the historical average yearly return of the S&P 500 is 10.326% over the last 20 years, as of the end of February 2023. This assumes dividends are reinvested. Adjusted for inflation, the 20-year average stock market return (including dividends) is 7.606%.
If you look at the average inflation rate and the adjusted returns for an index fund over the last twenty years you see a spread of 3.8%.
7.60-3.8 = 3.8%
So in this scenario your money is outpacing inflation by 3.8% because in the 7.60 number it has already been adjusted to calculate inflation in the returns.
Let’s look at an example with real numbers attached.
To estimate the amount of money you would need for a comfortable retirement, you can use the following steps:
- Estimate your annual retirement expenses: Start by estimating your annual expenses in retirement, including housing, food, transportation, healthcare, entertainment, and any other expenses you expect to have.
- Multiply your estimated annual expenses by 25 (Where does the 25 number come from?) By 2020, the average expected length of retirement was 19.5 years for men and 23.8 years for women.
- The 4% rule suggests that you should plan to withdraw 4% of your retirement savings in the first year of retirement, so you can estimate the amount of money you would need by multiplying your estimated annual expenses by 25.
For example, if you estimate that you will need $50,000 per year in retirement, you would need:
$50,000 x 25 = $1,250,000
So, you would need approximately $1,250,000 in retirement savings to support an annual retirement income of $50,000.
I used the market here to give you some examples that most people are familiar with. But as you know I am a real estate guy. So I invest in income producing real estate that will pay me for the rest of my life.
But this gives you an idea on what you should be shooting for in your retirement account. Also, keep in mind that many people spend a lot less the older they get. That is just a fact.
To your success and your future.
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