To help you with this most important of tasks, here's a quick and dirty way to calculate how big your nest-egg needs to be on Day 1 of retirement.
- Step 1 - Determine how much you're going to spend each year in retirement, in today's dollars. For this example, lets assume you need $70,000 to live the lifestyle you want.
- Step 2 - Figure out how much you're going to receive annually from secure sources such as Social Security or pensions. In this case, we'll assume $30,000 in Social Security payments.
- Step 3 - Subtract the difference and multiply it by 25. $70,000 - $30,000 x 25 = $1 million.
- Step 4 - Adjust for inflation. That $1 million is in today's dollars. If you're 20 years away from retirement and you think the average inflation rate will be 3%, you'll need $1.8 million on your first day of retirement. Use the second table on this webpage to make your own calculation.
At first glance, this seems like a shockingly high number to most investors. However, if you start investing at an early age it's a very easy goal to meet. The later you start investing the more of your paycheck you're going to need to save and you'll probably find that you need to work longer than you'd like.
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Posted In : Personal Finance