Tuesday, August 25, 2009

How Much Money Will You Need in the Future?

Yesterday I asked I posed the question of retirement, whether you intend to or not. My point was that it doesn’t matter if you don’t “intend” to ever retire; life may make the decision for you. And if the decision is made that you must stop working, you’ll want to be prepared. So just how prepared or how much money will you need in the future? Sorry, no crystal balls here. One calculator told me that I would need $1.6 million another just around $800,000.

The guideline used to be that you could live on 70-80% of your highest salary. People used to count on a lower cost of living because the kids were gone, the house could be smaller, and work expenses like transportation and wardrobe were gone.

It also used to be that you could count on pensions and social security to cover a good chunk of expenses. And while we’re on the topic let’s not forget where social security came from in the first place. It was a depression era invention to encourage older workers to move out and make room for younger employees (a.k.a economic stimulus).

But times have changed. Like I pointed out yesterday people aren’t retiring as planned for a variety of reasons. So we shouldn’t think of 401(k)s, IRAs and stock investing just as “retirement plans”. Maybe a better term would be future wealth plans.

If there is one thing that you can count on for the future is that everything will be more expensive. So if you think about building your future wealth the first thing you’ll need to think about is your future. What do you want it to be like? Set your goals for future wealth on things that are tangible, not just arbitrary numbers that might make you comfortable.

Someone looking to generate $40,000 a year in retirement strictly from personal savings would need a nest egg somewhere between $500,000 (12.5 times the initial withdrawal) and $1 million (25 times the initial withdrawal).

A conservative rule of thumb suggests that if you withdraw only 4% -- or one twenty-fifth -- of your retirement nest egg during the first year and adjust subsequent annual withdrawals to compensate for inflation, you'll never outlive your money. Another approach is to estimate how much you'll need to withdraw from savings during your first year of retirement and multiply that amount by 25 to determine your target number.

So exactly how much do you need?
Two answers: 1) it depends and 2) probably more than you think.

I know I haven’t given a straight answer about how much you should be stuffing away, but all I really hope to impose on you is that even if you have no intention of retiring, you still need to build wealth for future needs.

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