How Much do you Need to Retire?

sarahheller By sarahheller, 2nd Sep 2011 | Follow this author | RSS Feed
Posted in Wikinut>Money>Pensions

The recent recession and the accompanying volatility in the stock market has wiped out the retirement savings of a lot of seniors. Because of this, many seniors are taking a hard look at their finances in order to figure out how they can retire. For many of these seniors, the key question they ask is how much they need to have saved in order to retire.

How Much?

In order to come up with a good figure for how much an individual or family needs to retire, a good starting place is computing the average amount of money that is spent on necessities in a month. Gather together all of your monthly bills, and add up the total amount spent on housing, transportation, and utilities. Next, go through your old bank and credit card statements and compute how much is spent on items such as groceries and other household goods. Include pro-rated amounts for insurance and other bills that are only paid once or twice a year (such as property taxes).
Now, take this number and multiply by twelve. This will give you the total amount spent on necessities in a year. Now, subtract any expected income in retirement, such as Social Security and pension payments. The remaining amount is the amount that must be made up out of your personal savings.
Figuring out how much you need to have in savings can be a bit of guesswork. The first method is a simple formula that many financial advisors use. Take the remaining amount found in the above calculation, and multiply it by 25. This will give you the amount you must have in savings in order to make your savings last 25 years if your savings earn absolutely no interest. If you retire at age 65, this amount will last until you turn 90 if you keep all of your money under a mattress. In an interest bearing account, the money will last even longer
There are flaws with this approach, however. The first is that it does not take into account any interest earned or losses on the money. The second is that it does not take into account inflation. The quick solution to this is that the amount earned in interest on the account will make up for inflation. In other words, by withdrawing 4% of the total amount of this account you have a good chance of not outliving your money. Recently, however, poor returns in savings bonds and bank accounts have negated this approach. In order to compensate, it is recommended that you either save 30 times the amount you need, or place some of your savings in the stock market in order to see higher returns.
Keep in mind that this formula will only give you the bare minimum you need to retire. If you plan on traveling or buying a larger house you will need to add these costs to the amounts you calculated above.

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