No matter how young you are it’s never too early to start planning for retirement. For most of us, 50 years of age would be an ideal retirement age. You’re still young enough to enjoy life and hopefully have a lot of time to do it. So, how much money do you actually need to retire at 50? Let’s look over the assumptions you need to make to arrive at your personal “retirement quote”.
First of all, you’ll need to cover all of your expenses each year. You’ll probably be more active at the beginning of retirement than at the end, so you’ll probably need more money in the early years for travel, vacations, supporting your kids, etc. However, in your later years you’ll likely need money for healthcare, which has been rising much faster than other expenses. For our purposes, let’s assume equal annual withdrawals to simplify. So, for our example, lets assume you live on $100,000 per year now but that you’ll need $120,000 per year during retirement. Also, assume that social security will cover $25,000. That means you’ll need to withdraw about $95,000 per year from your nest egg.
Next, let’s figure out how fast your retirement savings will grow during retirement. Hopefully you’ve been investing mostly in stocks and should be able to earn around 8-12% per year. Okay, it hasn’t been that smooth for the past 10 years but this has been an anomoloy. Let’s assume things become more “normal” and that during retirement you pare back your stock holdings to around 60% and that, with bonds and cash, you earn an average of 6% during retirement.
Now, let’s figure out how inflation will affect these returns. Historically, inflation has averaged 2-4%, with cycles reaching as high as double digits. For our generation, inflation will likely increase given the high levels of debt, deficits and money creation. Also, your personal inflation rate may be higher if you consume high inflation goods like oil and healthcare. For our purposes, lets assume inflation averages 3%.
The final piece in the retirement puzzle is the toughest. How long do you think you’ll be retired? In other words, how many years do you expect to live? You can reference government life expectancy charts on this one, but for our purposes, let’s assume that you may live to 100. And since you’re retiring at 50, you’ll need money for about 50 years.
Okay, so let’s enter all these assumptions into our retirement planning calculator spreadsheet….
The answer:
$2.5 million!
So, given the assumptions above, you’d need to save about $2.5 million dollars to retire at 50 with $95,000 per year in income from your retirement savings, at 6%, for 50 years, with 3% inflation.
If you’d like to do your own calculation, please download our free retirement worksheets:
- Excel 97/2000/XP Retirement Calculator
- Excel 2003 XML Retirement Calculator
- OpenOffice Retirement Calculator
If you don’t have Excel you can download free spreadsheet software at openoffice.org.
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{ 5 comments… read them below or add one }
Ouch, that’s a lot of money. I see now why so many people retire at 50 – even if they’ve just sold a really decent business they started.
Nice retirement calculator spreadsheet! I am hoping to retire by the time I’m 50 but I’m not quite sure I can save that much money. Because I have a pension that will cover a good portion of my living expenses, my number is just over a million dollars. However, I didn’t start saving until my mid thirties so I’m a bit behind.
Anyway, thanks for providing this free retirement calculator.
If my money makes 8 to 12% as stated in the article and inflation runs at 3%, then with 2.5 million in the bank I am making on interest 125000 to 225000 dollars! and not touching the principle. Were did I go wrong?
Hi Louis,
I stated that investing in stock typically returns 8 to 12% but just below that I assumed that during retirement you would only invest part of your portfolio in stocks and that you would average a return of about 6%. 6% less inflation of 3% would yield 3% on $2.5 million, which is $75,000 per year. That means that with the other assumptions above you’d still need to pull out $20,000 from your savings in year one.
The beauty of this retirement calculator is that you can change all of the assumptions to figures that you believe are achievable. For example, if you invest conservatively and you believe stocks are going to return less for years to come, you could assume a return of only 3 or 4%. Because everyone’s investing style, income needs, and life expectancies are different, each person will have a different retirement plan.
Tools like these are a good way to get an idea of how much money you’ll need to retire, but they are only one of many tools. Make sure you also use rules of thumb like the 4% rule and try several other retirement calculators to help calculate your number. That way you can create a large range of figures to see all of the different possibilities.
I love this retirement calculator spreadsheet! Some tips on how to use it are to really play around with the assumptions. For example, make an estimate of how much you need to retire if you earn ten percent and five percent on your investments. Also, assume you will live to be 70 and 100.
Complete the retirement calculator with all of the conservative assumptions and then all of the more aggresive assumptions and get a range. Retirement is not really about a specific number, but more about understanding what the numbers mean.