There are so many people out there that see retirement as a distant future event and feel that they don’t even need to start thinking about it until 20 years down the road. In fact, it is common for a family to spend more time planning for their big vacation each year than on planning for their retirement. Doesn’t that seem strange to you? I hope so! At some point we will not be able to work anymore, which likely means that the majority of our income will be halted. However, we still aren’t planning for this in our future? Something is wrong with this picture.
The Typical Spending Trend
Instead of putting $250 into a retirement fund each month, the great majority of people just decide to invest whenever it is convenient for them (which often turns out to be never). In their minds, they will build their savings up to $1,000 and then make a sizable deposit into their retirement account. But, the money never seems to grow to that particular dollar amount, mainly because they freely spend it along the way: concerts, sporting events, new rims for the car, a new stereo – somehow these items just seem like a better idea at the time.
Now, I am speaking in generalities of course. Not everyone chooses to invest $0 each month. There are some who have an automatic draw set up on their paycheck. Before they even get paid, a small portion of their money gets placed in the company 401(k) or 403(b). This, by the way, is an absolutely fantastic idea! By withdrawing the money before you see it, your retirement savings will just be automatic. But, with this method, do you know how much you’re likely to have when you reach retirement age? Many have absolutely no idea, and this is the real problem.
How Much Do You Need For Retirement?
It can be quite overwhelming for some to figure out their retirement needs. How much money should be invested each month? If they do that, how much money will they have in 30 years? And, will that amount of money be enough to last them for the rest of their lives? These are all important questions and they seem daunting, but really the answers are quite simple.
First of all, how much money will you need in your retirement years? For most, they just want to be able to keep living the same lifestyle. If you will soon retire and your expenses are $30,000 a month, then I would encourage you to save up $750,000, which is simply your expenses multiplied by 25. There is plenty of math that goes behind this formula, but I don’t need to bore you with those details. Simply save up $750,000 and spend no differently, and you will make it through your retirement years without spending all of your hard-earned money.
Full Retirement Fund = Yearly Expense Amount * 25
So what if you are not yet ready to retire? What about inflation? Yes, that should be factored in (don’t let your eyes glaze over yet! This part is simple too). Inflation tends to double our expenses every 20 years. So, if you have 20 years before your retirement date, then you should double your yearly expense amount. If it takes $30,000 a year for you to live comfortably today, then you should plan on spending $60,000 a year in your retirement years (which is 20 years down the road). Make sense? I hope so!
Full Retirement Fund in 20 Years = Yearly Expense Amount * 2 * 25
And, if you don’t plan to retire for another 40 years, you’ll have to double your expense amount again.
Full Retirement in 40 Years = Yearly Expense Amount * 4 * 25
For me, I figured that I would like to have $50,000 per year, but by the time I retire this amount will be equivalent to almost $200,000, which means that I will need $5,000,000 in my retirement fund. Whew! That is pretty steep, but at least I know this now so that I can start investing appropriately!
How Much to Invest Each Month?
So once you know your number, how can you figure out how much to invest each month? For this, I like to use Dave Ramsey’s Investment Calculator.
Simply put in the amount that you currently have invested, enter 8% in the “Annual Rate of Return” column, enter the amount you plan to contribute each month, the number of years that you plan to contribute, and the number of years from now that you expect to retire. Pretty simple right? Once your numbers are in, click “Show Results” and see how close to your number you get. If you are low, add to the contribution amount in the calculator and see how much it would take for you to reach your retirement goal.
All of this should really take you less than 30 minutes, but it could make a million dollar difference for your retirement future. Take the time now to figure out your number and also what it would take each month to get you there!