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Adequate Retirement Savings Goal: How to


What’s the adequate dollar amount you will need in retirement? Even better what is an adequate retirement savings goal? And how to calculate your expenses for your golden years; is a much discussed topic for individuals just starting their working lives, and ones knocking on the door to retirement age.

I much preface the rest of this article by saying it is never too early or too late to plan for retirement. Retirement is not a finish line it is more like the half way marker in a marathon.

Life after you retire will hold many pleasures and new sets of challenges, but finances should not be one of those challenges. This article will help you determine your expenses in retirement, amount needed during retirement, and the goose that lays golden eggs (Keep reading and I will explain).

Expenses during retirement

Apart of the retirement equation is to know what your expenses will be in retirement. Evaluating the amount of out-go in your budget will help to paint a dreamlike picture for retirement.

The best way to determine your expenses in retirement is to adequately determine your current (If you’re within ten years of retirement) and projected (If you have more than 10 years to retirement) budget allocation.
Need help with your budget allocation check out this article for a guide to allocating your income. Now that you have your budget allocated and you have identified how much of your income is expense related ( the amount in layers one and two of the allocation frame work).

This total is the amount of budgeted expenses that we will use to determine what amount is needed in retirement. For example, if you are within 10 years of retirement you should use this amount as a good estimate for your expense.

In 10 years your expenses may vary, but this estimate will provide the starting point. On the other hand, if you have more than 10 years before you retire you will need to adjust for inflation with your estimate.

If inflation averaged 3 percent over your working years; then, every $1,000 worth of expenses will be worth $2,000 in 24 years. Therefore, if you had 24 years to retire you could take your monthly expenses and double that number, and have the estimated expense amount during retirement.

Amount needed to retire

Now that you know your monthly expense amount let’s estimate how much you will need the day you decide to retire from your day job. Break down your expense amount in three equal amounts.

One third of your expenses will be covered by social security or pension payments. The second 3rd will be covered by the amount saved for retirement, and the last third will most likely no longer exist in your retirement years.

The second 3rd is what we want to focus on in retirement. For example, your yearly expenses are $30,000 and a 3rd of that will be $10,000; therefore, resulting in an $833.33 monthly expense amount.

Take the $10,000 worth of expenses and multiple by 20 and you will have the amount you need the day you decide to retire. In this example you would need $200,000 dollars in savings for retirement.

This number will vary for you depending on your amount of expenses at retirement. The more expenses you have in retirement the more you will need to save, and vice versa for reduced expenses in retirement.

Next stop retirement

Now you are all set for retirement if you followed the evaluation above. $200,000 will have a 96% chance of lasting 20 years of retirement, and more if you decide to multiple the above examples by 25 or 30. Below is a picture from Vanguard demonstrating the range of investment income over 20 years.

Adequate retirement savings goal

Retirement cal

In the top right corner of the picture above is the mix of investments in the theoretical investment portfolio. This mix is very conservative with only 20% in stocks and the 80% in Bonds and Cash.

If you were to leave this money invested and only took monthly disbursements of 833.33 ($10,000 annually) the rest of your money would stay in the prescribed investments and earn over the next six years while in the interim you will only take approximately $60,000 dollars out during this time frame never touching the 70% investment in the market and bonds.

This 70% can be referred to as the goose, and as long as the goose is managed with investment with strong five to ten-year track records you should not have to touch the principle amount of $140,000 ($200,000 – $60,000 (Cash)).

Thus, allowing the goose to continue laying golden eggs, and result in an account balance of $500,000 or more as seen in the chart above by Vanguard retirement calculator.

As I mentioned retirement is not a finish line it’s the half way marker in a marathon where the 2nd half of the race is more enjoyable than the first half. In my 2nd half of the marathon I plan on planting seeds that my family will benefit from for generations (it’s cool to DREAM BIG right!!).

What’s your retirement marathon dream let me know in the comments below? Any questions?

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