How to calculate your ideal nest-egg?
After you plan when to retire, the next step is to take into account about how you will feel when you are retired and no longer get regular paychecks. You will probably need more or less a hundred percent of your full annual income (in a few years after retirement or perhaps forever) to maintain your lifestyle. How big a nest-egg you will need to sustain your lifestyle? The answer is usually “a lot.”
It is recommended that you save 12 times the full monthly income of the year before retirement. This formula is a reliable starting point if you seek to retire at the Social Security standard retirement age (65 to 67). If you retire sooner, you will need to save more money. If you get a company pension, additional sources of income, or if you wish retire later, you can get away with smaller nest-egg.
If you are retiring soon
Let's assume that you are retiring by the end of the year and that your full annual salary is $120,000. According to the formula above, you should save $1,440,000 to hit the “twelve times” goal.
Sound like plenty of money? Of course, but it would provide roughly an average of $80,000 each year from inflation-adjusted income over twenty-five years, assuming that
• The inflation rate is three percent.
• There will still be small cushion at the end of twenty-fifth years.
• You invest 50 percent your nest egg in bonds and the other half in stocks during this period.
An annual income of $80,000, for some people may not sound like much, even so remember that taxes are usually lower for retirees, and you will not need to save a part of your income for the retirement anymore. And your spending will likely be less compared with when you were working full time. Your income likely can also be supplemented by the Social Security and taxable savings, and also any of the other income sources, giving you a sufficient level of retirement income.
If your retirement period is further off
Maybe you are asking yourself; I am not retiring in eleven years, so how can I know how much I will be earning a year before retirement?
Let's assume that you are 52 and you wish to retire when you are 63. You need to visualize what you will be earning 10 years from now - at age 62, the year before your retirement. Decide on the average rate that you assume your income to increase - let's say, five percent.
If you current annual income $100,000 you may assume that at 62 years old your annual salary will be $150,000 (five percents raise each year). Using the ‘twelve-times’ rule, your desirable nest egg should be $1,800,000 (12 × $150,000). This is a simple way to get an approximate idea of how large a retirement account to build, in spite of your current income or age.
It is recommended that you save 12 times the full monthly income of the year before retirement. This formula is a reliable starting point if you seek to retire at the Social Security standard retirement age (65 to 67). If you retire sooner, you will need to save more money. If you get a company pension, additional sources of income, or if you wish retire later, you can get away with smaller nest-egg.
If you are retiring soon
Let's assume that you are retiring by the end of the year and that your full annual salary is $120,000. According to the formula above, you should save $1,440,000 to hit the “twelve times” goal.
Sound like plenty of money? Of course, but it would provide roughly an average of $80,000 each year from inflation-adjusted income over twenty-five years, assuming that
• The inflation rate is three percent.
• There will still be small cushion at the end of twenty-fifth years.
• You invest 50 percent your nest egg in bonds and the other half in stocks during this period.
An annual income of $80,000, for some people may not sound like much, even so remember that taxes are usually lower for retirees, and you will not need to save a part of your income for the retirement anymore. And your spending will likely be less compared with when you were working full time. Your income likely can also be supplemented by the Social Security and taxable savings, and also any of the other income sources, giving you a sufficient level of retirement income.
If your retirement period is further off
Maybe you are asking yourself; I am not retiring in eleven years, so how can I know how much I will be earning a year before retirement?
Let's assume that you are 52 and you wish to retire when you are 63. You need to visualize what you will be earning 10 years from now - at age 62, the year before your retirement. Decide on the average rate that you assume your income to increase - let's say, five percent.
If you current annual income $100,000 you may assume that at 62 years old your annual salary will be $150,000 (five percents raise each year). Using the ‘twelve-times’ rule, your desirable nest egg should be $1,800,000 (12 × $150,000). This is a simple way to get an approximate idea of how large a retirement account to build, in spite of your current income or age.
[posted by : OFP on Nov. 22, 2009]
TAGS: how to, calculate, nest-egg