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  • Writer's pictureNathan Lippincott

Estimating Retirement

Updated: Jul 22, 2018

Saving for retirement is one of the biggest parts of being able to reach financial freedom. Nathan Lippincott, financial advisor and budgeting expert, share some retirement-savings options.

There is one age-old financial question that is at the forefront of nearly everyone’s mind: how much money will I need in retirement? If you are struggling with debt, have limited savings, and no idea where to start, this can be a very scary questions. Fortunately, there are several things you can look into that can help clarify the situation and ease any anxiety regarding the future.

How Many Years to Save For

To calculate retirement, one important thing to know is how long you will live, which of course, is something no one knows. The best thing we can do is use statistics to guess. For instance, if you are under the age of 30 right now, the chance of you living past 100 years is pretty high. At the time of the American Revolution, life expectancy at birth was 23 years of age. Even by 1900, Americans were expected to live only to age 47.

However, today these figures are totally different. Research suggests that people will continue to live longer due to better quality of life and medical care. Soon, half of all deaths in the USA will occur after the age of 80. Such life expectancies are a big part of why we need a plan for finances in the future. If you want to retire when you're 65, that could mean you need to have enough to live off of for 35 years!

Methods of Saving

Now that we know that it is most likely that we will live longer than our predecessors did, it is important to estimate how much money we will need in our later years. There are a couple of different ways to look at this.

4% Rule: People believe that if you draw 4% out of your retirement each year, you will never run out of money. For example, if you have a million dollars, you can withdraw $40,000 per year and never be able to outlive your money. *It is expected that the market will grow at 7% per year and then, paired with inflation at 3%, you will be taking out what you are making each year.

25 Times Rule: This one is fairly easy. If you think that you will need $50,000 per year while you are retired, then you multiply this figure by 25, which equates to 1.25 million. If you need $100,000 per year in retirement, you will need 2.5 million saved before you can retire.

Coming up with what you think that you may need annually may be easier than you think, but it also comes down to a lot more factors than you realize. Consider these questions:

  • Are you going to get Social Security?

  • Do you have a pension?

  • How much is inflation?

  • What will your health costs be?

  • At what age do you want to retire?

15% Method: Many people believe that as long as you are saving 15% of your salary towards retirement, then you will be fine. The success of this method depends on how early you start this approach. Age is crucial to the retirement game and compounds interest. It is often better to pick one of the first two options for your retirement plans since most individuals do not start thinking of retirement early enough for the 15% approach to work.

Start Thinking About Your Future Now

In today’s world, the younger you are, the less likely you will receive Social Security benefits – or, at the very least, you will draw a lot less than what you had planned to. This changes retirement estimates drastically, as do inflation rates. You can plan on inflation doubling every twenty years. So, if you make $50,000 per year, then in 20 years, you will need to make around $100,000 to accommodate for the inflation rates and be living at the same level you were before. Because of this, in retirement you will need more money than most of you initially thought. If you are 50 years old or older, you will have to plan on withdrawing double what you are making in order to maintain the lifestyle that you are currently enjoying.

All this information can seem intimidating and stressful.

I would recommend planning on the worst-case scenario and sitting down with an experienced financial advisor to look at all factors and options. A second opinion, especially an experienced one, is vital here. There are no other retirement options available at the time – you cannot borrow for retirement, so it is important to plan for it. I have never heard anyone say that they had too much money in their retirement fund, but I have heard the opposite quite often. Now is the time to begin investing in the future – it will be here before you know it!

*Past Performance Is No Guarantee of Future Results


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