Estimating Your Needs for the Future: 12 Times

Many have taken credit for the 12 Times Rule most often it’s been accredited to Jonathan Clements, former columnist for theWall Street Journal.

This formula assumes three things: 1) that your income will increase to match inflation, 2) you draw 5% of your savings as income the first few years of retirement, and 3) your return on ivestment is 5%.

The 12 Times Theory states that your wealth should equal 12 times your income. The amount you’ll need to set aside each month is dependent upon how long you have until retirement and your current savings-to-income ratio.

Using the 35 year-old that we’ve used before it might look like this:
$75,000 annual income X 12 = $900,000. But that’s not all…

This amount indicates 60% of your pre-retirement income. Combined with Social Security and other income, you might end up with 80%, a figure that most retirement calculators assume is enough. Alternatively, if your own calculations show that you need a higher percentage, then you need to amass more than 12 times your income.

It may seems like a crazy amount of money doesn’t it? But actually it’s not.

Yes, the ways you can look at determining future wealth needs are vastly different. In the end, however, though they may spit out amounts that vary slightly, they all seem to point in the range of $1 million. Pie in the sky? Possibly. But it’s not a bad thing to shoot for if you can make that your goal without getting too focused on the almighty dollar.