We’ve already seen how easy it is to calculate how long it will take you to retire using the simple savings rate calculator, but what if you are trying to figure something else out, specifically, how much money you need in order to be able to retire?
There is a little shortcut to reaching this figure and it’s known as “the 4% rule”, or the “safe withdrawal rate” in other circles.
The safe withdrawal rate, or 4% rule, tells you exactly how much you can spend during your retirement, without your money running out.
Now that might sound really simple, but it’s actually quite an elusive figure to accurately estimate. There are various different assumptions that need to be made, most of which you simply cannot know in advance. One of the major assumptions is how much inflation there will be between now and when you retire. Will your rent remain at $1,500 a month, or be closer to $2,500? You can’t possibly know that.
People can make wild guesses, maybe you need a million, two, five? A more accurate way to calculate it could be to multiply your annual expenses by a certain figure. If you’re following the 4% rule, you simply multiply your annual expenses by 25, and that is what you would need to be able to live off of. However, this is also a ballpark figure, more conservative people may want to use a rule of 3%, multiplying their annual expenses by 33.3 instead. Assuming your annual expenses are $50,000, the rule of 4% states you will need $1,250,000 to retire, whereas a 3% rule gives $1,665,000. Let’s assume you go with 4%, where does this number come from? [Read more…] about How Much Money Do I Need to Retire?