How much money do you need to retire comfortably?
Thu Mar 26, 2009 | | Posted in Finances Retirement
Searching for some information through my favorite search engine, I came across a statement. “There is no rule of thumb per say how much you need to retire comfortably.” Most financial advisers agree that, perhaps, the first few years of your retirement, your yearly income should be about 80% of your income just before you retired or will retire. In subsequent years, it should be lower than 80%.
However, having said that, what’s important is to be able to know whether a rule suits your specific situation. Here are some of those rules, and some considerations that should not be overlooked.
- Life insurance
Your life insurance should equal five times your yearly salary. The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to.
- Savings
Save 10% of your salary per year. You may need to save much more than ten percent of your gross income to have a comfortable retirement. The amount you need to save for retirement depends on how large your existing nest egg is and how old you are. Those who started saving late in life – in their 40s – need to save at least 15 or 20% per year.
- Retirement plans
Contribute as much as you can to retirement plans. This makes sense for most people, but if you have accumulated a large amount of money in a retirement plan – close to a million dollars – you may reach the point where the negatives of contributing to your retirement plan savings outweigh the positives.
- Investments
There is a what some call “cookie cutter” rule. Subtract your age from 100, and invest that percentage in stocks. I am 60 years old, so if I have some money which I don’t, I would invest 40% of it in stocks. For some younger investors, it results in a portfolio that is much too conservative. The best method of allocating your assets among various types of investments depends on your financial goals and needs, and your willingness to risk your capital. In this case, rules of thumb do not serve the investor at all.
- Emergency fund
Maintain an emergency fund of six months’ worth of expenses. Depending on your family’s situation, three months’ worth of expenses might be enough of an emergency fund; or six months’ worth might be totally inadequate. The amount you should keep on hand depends on how easy it would be for you to take out a short term loan, and how much money you have in savings and investments, among other things.
In a Nutshell
In general, you need 80% of your pre-retirement income to retire comfortably. The amount of income you need depends on whether you have paid off your mortgage, whether you will have other sources of retirement income, and on other factors.
Do not rely on any rule of thumb to make financial decisions. Instead consider carefully what your needs and goals are, and calculate what you will need to do to fulfill them.
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Information contained herein is general in nature, and is provided for informational and educational purposes only. Past performance is no guarantee of future results. Talk to your financial adviser.
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