How Much Do I Need To Retire?

This is a loaded questions with a lot of variables to take into consideration. As a result, the answer to this question is, similar to an anesthetic plan for a patient, it depends. There are a million and one different suggestions on how one needs to save for retirement. Some say you should save enough to be able to access 85% of your pre-retirement income during retirement. Assuming your salary is $180,000, then the recommendation is you need to save enough to have an annual retirement salary of $153,000. There’s the 4% rule, the rule of 25, and countless others. They all, more or less, calculate the same figure. And of course, there are numerous retirement calculators that you can find online to help you calculate this figure. Despite this access to a plethora of resources, the question comes back to, how much do you really need?

The answer to this question can only be elucidated by you. Think long and hard about your retirement goals. Yes, retirement is 30, maybe 40 years away (33 for me) and while it feels like a long time, you’re best served if you start saving early to take advantage of compound interest.

So, it’ll behoove you to take some time to think about what you want out of your retirement. Some people want to retire at 65. Some want to retire at 55. Others want to travel extensively upon retirement. Some want to simply live simply in a cottage out in the countryside. There is no right or wrong answer to this. It’s a matter of figuring out what it is you want when you retire.

Once you’re able to determine your retirement goals, it’ll help guide you towards calculating a numerical figure that you need to reach in order to achieve your retirement goals. This is where the aforementioned “rules of retirement” come into play.

4% Rule / Rule of 25

The 4% rule is based on the idea that you should only withdraw 4% of the balance from your portfolio while in retirement. Theoretically, the withdrawals you obtain from your portfolio should only comprise of the interest and dividends you’ve obtained from all the years spent investing into your retirement. By some measures, it is considered to be a safe withdrawal rate. The great thing about this rule is that it takes into account inflation. The 4% figure comes from an assumption that your investments appreciated in value by 7% annually and inflation increases by 3%. You take the difference and you arrive at 4%.

So, now you’re thinking, okay, I get it, I should only aim to withdraw 4% of my portfolio every year so that I only draw down on the interest and dividends, but not the principal. You still haven’t helped me figure out how to calculate a number to retire on.

The 4% rule implicitly implies a multiplier of 25. Again, without getting into a lengthy discussion on the topic, many personal finance sites suggest you take your annual expenditures and multiply it anywhere between 20-25. By multiplying this figure by 25, the assumption is based off of a 4% withdrawal rate.

This is where your retirement goals come into play. Once you’re able to elucidate your retirement goals, you should be able to come up with a rough estimation on the annual cost of achieving and maintaining those goals. For example, let’s say you want to live in Montana on a ranch and the annual cost of living on this ranch will be $30,000.

$30,000 x 25 = $750,000

So, you would need $750,000 to retire and achieve the lifestyle you’re anticipating in Montana.

However, let’s say you want to be a world-traveler and expect your annual expenses to be $60,000.

$60,000 x 25 = $1,500,000

A very different and much larger figure than $750,000. If you’re expecting to need a larger amount on retirement, then it goes without saying you need to start saving early and start saving more. If you want to retire early AND achieve those goals,  then you need to be aggressive with your saving.

So, do you really need to save enough to be able to access 85% of your pre-retirement income? That depends on your goals and what you hope to achieve in retirement. It’s not necessary, but obviously, the more you can save now as a young CRNA, the better off you’ll be by the time you retire.

In a future post, we’ll get into the math of calculating and comparing different retirement figures.

Main Points

  1. Determine your retirement goals

  2. Calculate your annual expenses for retirement

  3. Multiply your annual expenses by 25 to determine how much you need to retire

  4. The 25x multiplier assumes a 4% withdrawal rate (7% rate of return on investments – 3% annual inflation rate)

  5. Save early and save often


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