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How Much Money Do You Need to Retire?

Use the 4% Rule to Help You Estimate How Much Money You'll Need to Retire

The most commonly asked retirement question is "How much money do I need to retire?". Although a little simplified, the quickest way to get an estimate is to multiply your first year of retirement needs by 25. In effect, this assumes that you are withdrawing 4% of your total retirement savings per year. For example, if you are planning to retire in 5 years and expect to need $40,000 per year, you would want to have about a million dollars in your retirement account.

Don't forget to factor in other sources of income. Subtract the amount of social security income and pension income from your annual needs. Also, if you are planning for a retirement that is more than a few years away, make sure you account for inflation by adjusting your annual needs upward.

Some other important things to remember are that health care expenses are increasing faster than income and savings rates. Also, don't forget about any children or parents that you may have to provide for, whether it's education, housing or elder care. And remember, you may need a home too someday that could cost more per month than your current living expenses. It's always best to aim for closer to 50 times your first year's retirement needs.

Years before retirement you should talk to a tax advisor to make sure you set up your accounts in the most tax efficient manner.  This could include how your will creates trusts upon you or your spouses deaths, as well as which tax free accounts you should plan on withdrawing the money from when you do retire.


See Also:  Other Retirement Advice