The magic numbers here are '4' and '25'.
A lot of investment websites state that a the average safe (read: relatively low risk) portfolio returns 4% per year. With this in mind, it would be safe to assume that when you've amassed your retirement nest egg it should be large enough to return you 4% from it. The idea behind this is that you will be living off the interest alone and your capital won't be corroded. However, the investment amount will probably decrease in real term value, thanks to inflation (more on this later). This shouldn't be too much of a problem as most people spend less in the later years of their retirement than their early retirement. People take less vacations and spend less on extravagances when over 80
So, how do we work out how much money we need to have for retirement?
A common way to workout how much money you will need to have in savings, pensions and other capital for retirement is to workout how much you plan to spend in retirement each year. Then multiply this number by 25.
For example:
If you think that you will spend $15,000 per year in retirement. You will need $15,000 x 25 = $375,000.
This may sound a lot. It is worth bearing in mind that most people spend a lot less in retirement than in working life. Retirees tend to do less driving (insurance, petrol, tires etc), have less expensive lunches out with work colleagues and generally people are wiser with their weekly spending as they have more time to analyse their purchases.
When calculating how much you need for retirement, remember to take into account other sources of income such as government pensions and allowances. If, for example, you receive a government pension of $600 per month and you predict that you need $15,000 per year to live comfortably, then your math should look like this:
$600 x 12 = $7,200 (yearly income from government pension)
$15,000 - $7,200 = $7,800 (gross income per year needed minus government incomes = the additional income needed to reach your retirement goal)
$7,800 x 25 = $195,000 (the additional income that you need multiplied by 25 = the portfolio size you need to retire)
A lot of investment websites state that a the average safe (read: relatively low risk) portfolio returns 4% per year. With this in mind, it would be safe to assume that when you've amassed your retirement nest egg it should be large enough to return you 4% from it. The idea behind this is that you will be living off the interest alone and your capital won't be corroded. However, the investment amount will probably decrease in real term value, thanks to inflation (more on this later). This shouldn't be too much of a problem as most people spend less in the later years of their retirement than their early retirement. People take less vacations and spend less on extravagances when over 80
So, how do we work out how much money we need to have for retirement?
A common way to workout how much money you will need to have in savings, pensions and other capital for retirement is to workout how much you plan to spend in retirement each year. Then multiply this number by 25.
For example:
If you think that you will spend $15,000 per year in retirement. You will need $15,000 x 25 = $375,000.
This may sound a lot. It is worth bearing in mind that most people spend a lot less in retirement than in working life. Retirees tend to do less driving (insurance, petrol, tires etc), have less expensive lunches out with work colleagues and generally people are wiser with their weekly spending as they have more time to analyse their purchases.
When calculating how much you need for retirement, remember to take into account other sources of income such as government pensions and allowances. If, for example, you receive a government pension of $600 per month and you predict that you need $15,000 per year to live comfortably, then your math should look like this:
$600 x 12 = $7,200 (yearly income from government pension)
$15,000 - $7,200 = $7,800 (gross income per year needed minus government incomes = the additional income needed to reach your retirement goal)
$7,800 x 25 = $195,000 (the additional income that you need multiplied by 25 = the portfolio size you need to retire)
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