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….
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.