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How Much Money Do You Need to Retire?


No matter how much money that we may have, we will never be truly comfortable retiring; since we can not estimate how much money we will need in retirement.

For example, let’s assume that you paid off your house, so you no longer have a mortgage or rent to pay, and you have exactly one million dollars to invest for retirement. Since you want to retire immediately, you want to put your money in safe and insured U.S. Saving Bonds and Certificate of Deposits (CDs) from banks. A reasonable interest rate for these types of accounts is an average of 6%. Therefore in the first year, you will earn $60,000 in interest. Assuming an inflation rate of 3%, you would have to put $30,000 earned back into your principle of bonds and CDs, so that you get the same amount of money each year after inflation. Therefore, you only have $30,000 per year, excluding inflation, to spend on taxes, insurances, transportation, medical expenses, and regular monthly bills such as food, gas, electricity, etc. In most parts of the United States and with the average lifestyle of retires, this is not enough money to retire.

If you have twice the amount in principle (two million dollars instead of one million dollars), then you would be earning $60,000 a year after inflation. This is a much more reasonable for living in most parts of the United States and with today’s lifestyle.


You might be saying, “Hold on for a second, no one lives forever, so you can take money out of your capital each year.” Let’s say you again no longer have a mortgage to pay, have a million dollars to invest earning an average of 6%, and need $60,000 a year to live (and you need to increase this amount by 3% each year for inflation). In this scenario, your million dollars will be completely spent in less than 23 years. Do you plan on living more or less than 23 years? Do you need more or less than $60,000 a year to live in retirement?

To make calculating even more difficult, it is unlikely that you will invest all of your retirement money in bonds and CDs. Instead, you will be investing roughly half of your money in 401Ks, mutual funds, stocks, annuities, etc. that earned an average of 7-10% in the last 50 years. Keep in mind, this is only an average and has a huge variation from year to year. Using the previous scenario but earning an average of 8% a year using risky investments, this new scenario will make you money last almost 32 years but involves much more risk. Let’s say after two years in retirement, you lose a large percentage of your investments from typical market volatility. This may force you to return to the work force.


Additionally, you will have to expect unpredictable bills into your retirement calculations, such as periodic medical bills, an unusually long life, a new car every decade or so, possible assisted living, etc. This list goes on and on. You will probably need more money than anybody can reasonably predict, especially since it is nearly impossible to guess how long you will live with any accuracy.

Therefore, I hope I have convinced you to seriously think about how much money is needed when retiring. And try to never touch your investment principle and always factor the rate of inflation, otherwise you may run the risk of not having enough money in retirement especially if you live a very long life with a lot of medical bills. And if you are extremely conservative with your investments and lifestyle needs, then you will need at least 2 million dollars plus a home that is already paid to retire in 2007.

by Phil for Humanity
on 01/22/2007

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