Retirement is on the minds of tens of millions of people- and should be on the minds of millions more! But since it is a fairly complex subject, most people tend to put off planning for it.
That’s a huge mistake because if you don’t know how much money you’ll need, you can’t plan on how to get that money.
The good news is that it doesn’t have to be difficult. In fact, here are a few simple steps on how to determine how much money you’ll need in retirement.
Step 1: Think About What You Want
Some people dream of traveling all over the world when they retire. Nothing sounds more exciting than seeing other countries, experiencing new cultures, and just exploring.
For others, an ideal retirement means spending a lot of extra time with loved ones. After all, being with grandchildren is great because you can have a lot of fun with them, spoil them and then go home to avoid the sugar crash.
Whatever you want to do is up to you. But the important thing to think about is how much this lifestyle would cost.
Which brings you to step 2.
Step 2: Break Down the Costs of Your Retirement
If you’re going to be on the road all year round, you may be able to sell your home, or just rent a tiny, cheap apartment.
Meanwhile, being there for your family may save you money if you can live with them. Or you may find that your expenses go up if you spend a lot on your grandkids!
Either way, you need to break down how much life will cost you. Staying in the U.S. means you’ll probably have to pay a chunk towards health insurance every month, whereas traveling means you’ll have hefty airfare and hotel bills (unless you rent an apartment overseas).
Don’t forget about food, entertainment, and clothing either. Oh yeah, and taxes and inflation will still be around!
Step 3: Work Backwards
Once you know how much it will cost you to live, you can start working backwards to see how much money you’ll need.
For example, let’s say that you decided you would need about $4,000 a month, or $48,000 a year before taxes. If you want to live solely on the interest your investments bring in, you’d need about $960,000 in the bank assuming you earn 5% interest.
If you’re willing to take out some of the principle, you can have much less but keep in mind that it won’t last forever! It’s a good idea to live largely off of the principle if you can.
Step 4: Working Towards the Goal
Once you have a goal, you can develop a plan to reach that goal by your ideal retirement age.
So let’s say you’re 35 years old, and want to retire at 65. That gives you 30 years to build up your nest egg.
Then what you do is find a good compound interest calculator. There are several online you can use for free. With this tool, you can type in different amounts of money saved each year and an interest rate. Assuming you’re going to invest in the stock market, consider using about 7 or 8 percent.
Then you just play with the numbers to see what it takes to reach your goal!