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Financial Planning Fundamentals: How Much Do You Need to Retire?

You might have heard the standard “$1 million” or “twelve times your salary,” but retirement varies drastically for everyone. The basic retirement plan for one person might not be right for another. With so many unknown variables, there’s no way to calculate the exact amount you’ll need. But there are three financial planning questions you can ask yourself to calculate a rough estimate of how much money you’ll need to retire.

How Much Do You Expect to Spend?

If you dream of retiring to a private yacht in the Caribbean, you’re going to spend a lot more money than someone who wants a quiet life in the country. Obviously, the more you plan to spend, the more you’ll need to save.

Most financial planning experts say you’ll need about 80 to 90% of your annual pre-retirement income to support your spending. Without needing to pay payroll taxes, you won’t need as much money coming in to support your lifestyle. If you earned $50,000 per year pre-retirement, you’ll need at least $40,000 to maintain your lifestyle after retirement. Of course, if you plan on finally getting your Ph.D. or traveling the world, you might want to err on the higher side of the range.

How Much Will You Earn from Savings?

While it’s impossible to tell how the stock market will perform in the future (though that would be nice), you can look at long-term data to help with financial planning. According to Goldman Sachs, over the past 140 years, stocks averaged ten-year returns of 9.2%.

To adjust for inflation and erring on the side of caution (as you always should), it’s a good idea to aim for about 3.5% returns on your savings when planning how much you’ll earn from your savings through retirement.

How Long Will You Live?

It might not be fun to think about, but it’s an essential part of retirement financial planning. If you live to 100, you’ll need a lot more money to sustain yourself than someone who lives to 75. That’s 25 more years of savings you’ll need!

According to Social Security, the average male 65-year-old retiree can expect to live another 18 years to 83. For women, the expected life expectancy is 85.5. Of course, if you base your financial planning on living to 85, you won’t be very excited about your 86th birthday. If you’re healthy, it’s a good idea to plan to live 25 years after retirement, at least to age 90.

Consider All Variables for Accurate Financial Planning

Think about how much you expect to spend annually, how much you’ll earn from your savings, and how long you expect to live. Add it all up, and you should have a decent idea of what you’ll need for retirement.

Planning for retirement isn’t easy. With so many variables involved, it helps to have an expert on your side. Contact the experts at BD Financial Concepts for a free financial planning consultation to start your retirement on the right foot.