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How Much Will You Need?
Many people think they know how much they will need, but are often incorrect. We can say fairly safely that to retire in a reasonably comfortable style, you will need more than $1 million. Many experts often use the rule of thumb that the average person will need 70% of their gross income for each year while in retirement . The sad thing is, no more than 12% of us will achieve this level. In fact, less than half of us will fail to save up even $500,000!
In 1999, ABC news reported that "one-quarter (25%) of Americans believe their best chance to build wealth for retirement is by playing the lottery, not by patiently saving and investing ". Keep in mind, the odds of winning a lottery is approximately 1 in 20 million. The news report went on to say that "families are already putting $20-50 into gambling or unneeded consumption's each week". These families have failed to realize that if invested for 40 years at a 10 percent return, $50 a week would add up to well over $1,000,000. Even $25 per week would amount to nearly $500,000.
Here are some of the major factors that you need to consider before coming up with a retirement figure:
- Inflation - Inflation is the rate at which the general level of prices for goods and services is rising. This causes your purchasing power to fall. For example, something you could buy in 1972 for $1.00 would cost $3.78 in 1994. This means you cannot use your current expenditures to calculate how much you need because goods and services will undoubtedly cost substantially more when you retire.
- Social Security- In the United States the government sponsored retirement program doesn't begin until you are in your 60s. If you want to retire at 55 you will have to sustain yourself without any government help.
- Saving Slows - Remember that once you have retired, you will in all likelihood no longer be saving. Most of your income will be used for consumption purposes.
- Extra Costs - With old age also comes greater likelihood of sickness and extra costs in healthcare. You won't have your employer's health plan so budget for extra costs for your doctor, dentist, etc. If you drive a company car now, kiss that good-bye too.
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There are far more factors to consider other than what we have listed here. Use this list to get you thinking about different costs in your circumstance.
For another tool, check out this great retirement planning worksheet. There are several questions so take your time answering all of the questions to get the most accurate answer.
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