Planning for retirement should be exciting! This is your chance to design the life you want without a day job to prevent you from doing the things you’re passionate about.
But retirement also requires some careful financial planning to ensure that you have the means to fund the lifestyle you dream of.
With the reduction in jobs with pension plans, and questions about the stability of the social security program, investing for retirement is more important than ever before. While some employers offer retirement plans (like 401(k)s), these plans alone might not be enough to fund the lifestyle you imagine for your golden years. Also, since many formal retirement accounts can’t be accessed before the traditional retirement age (at least, not without severe penalties), those who want to retire early need to find alternative sources of income.
In this article, we’ll show you:
Five quick tips for retirement investing,
How to calculate how much money you’ll need for retirement,
Let’s start with five quick tips to help you make the most of your investments for retirement.
Start early. By investing early, you give yourself time to accumulate wealth with compound interest over a longer period of time!
Reinvest proceeds. Whenever you receive proceeds from your investments during your working years, reinvest those proceeds to grow your retirement nest egg faster.
Set a specific retirement goal. The retirement calculations in this article will help you establish a specific number you’re comfortable with.
Plan to live off your passive investment income. Rather than expecting to live off of your savings, aim to build a portfolio of assets that generates enough cash to cover your living expenses.
Consider consulting a financial advisor. With ever-changing tax laws and retirement account regulations, it’s worth having a professional review your retirement plan periodically.
Calculating How Much You’ll Need for Retirement
Calculating how much you’ll need for retirement can be complicated for a few reasons:
There is a margin of error when calculating future expenses. For example, many new retirees were blindsided by the dramatic inflation of 2021 and 2022. This inflation increased the cost of goods and services, and retirees can’t count on wage increases to counter-balance inflation. This is one reason why it’s smart to include real estate in your retirement planning; real estate serves as a hedge against inflation.
The cost of living varies by area. If you plan to retire in a city with a high cost of living, you’ll need more than if you were to retire in an area with a low cost of living.
Personal preferences determine how much you’ll need to live comfortably. Some retirees are happy to downsize to a tiny house with low expenses. Others plan to spend substantial amounts of money on travel and recreation during retirement. What kind of lifestyle do you want in retirement?
There’s no way to know how long you’ll live. Living longer means that your retirement savings need to stretch further over more years in retirement.
With those caveats, you still need to get an idea of how much you need to save for retirement. So we can offer some standard financial rules of thumb, and you can make adjustments to suit your projected cost of living for the lifestyle you want in retirement.
Method #1: The 10x Rule
The 10x rule says that you should have 10 times your annual income saved by age 67. If, for example, you make $100,000 per year, you should have $1,000,000 saved for retirement at 67.
Using this model, you meet the following savings goals:
By 30 years old: you should have enough in your retirement savings to cover a full year’s salary
By 40: you should have three times your annual pre-retirement income in savings
By 50: you should have six times your annual pre-retirement income in savings
By 60, you should have eight times your annual pre-retirement income in savings
By 67, you should have 10 times your annual pre-retirement income in savings
One downside to this plan is that it assumes you won’t retire until 67. This is problematic for those who want to retire early. Let’s explore other methods.
Method #2: The 80% Rule
The 80% rule says that your annual income in retirement should be 80% of your pre-retirement income. If you were to make $100,000 per year, for example, you would need around $80,000 to maintain your current standard of living in retirement.
This is based on the idea that some of your expenses will go down once you stop working. For example, you may have paid off your mortgage by retirement, and you will likely spend less on transportation without a commute or necessary travel for work.
The potential downside of this method is that your expenses might not decrease in retirement, particularly if you increase your social outings or travel more. It’s also possible that healthcare costs could increase as we age.
Method #3: The 4% Rule
The 4% rule states that you can withdraw 4% of your total retirement nest egg in your first year of retirement. Then, you can adjust for cost-of-living increases each subsequent year. The idea behind this plan is to make sure your retirement savings last for at least 30 years.
If, for example, you had $1,000,000 saved for retirement, you could take $40,000 to cover living expenses in the first year.
As with the 10x rule, this plan does not account for those who wish to retire early.
Method #4: Build a Portfolio that Generates Enough Income to Cover Your Living Expenses
With this method, you can calculate how much you’ll need to cover your living expenses in retirement, then build a portfolio of investments that generate this much income annually.
You can base your living expenses on your current living expenses, making adjustments for lifestyle changes you expect in retirement. Then you can build a diversified portfolio of stocks, bonds, and other alternative investments that produce passive income.
Passive income from real estate is more predictable than passive income from other investment types (like dividends from corporate stocks, for example). Real estate investors can generally predict property expenses with accuracy and typically know how much they can charge in rent for each unit.
With this in mind, let’s see how much money you might need to retire at different ages based on these strategies.
How Much Money Do I Need to Retire at 65?
Let’s assume you currently make $100,000 per year in pre-retirement income.
Using the 10x Rule, you could retire at 65 with $1,000,000 saved for retirement. But, if you apply the 4% rule to your million-dollar savings, you would only be able to withdraw $40,000 from your retirement savings in the first year. And you could only make modest adjustments to that amount in future years. Therefore, you may need to make dramatic lifestyle adjustments to stretch your budget.
Now, let’s consider the portfolio income method.
First, we can apply the 80% rule to reduce your annual income needs from $100,000 per year to $80,000 per year, which comes to $6,667 per month. So you just need a portfolio of assets that generates this amount. Real estate is a solid option because netting $7,000 per month in rent is perfectly manageable, particularly in high-value markets like Los Angeles. And especially when the mortgages have been paid in full! If you’re planning to retire 30 years or more from now, you can plan to have your investment properties paid off so that your only expenses are taxes, insurance, maintenance, and any vacancy loss.
How Much Money Do I Need to Retire at 60?
Since the 10x rule only applies to those looking to retire at 67, you need a different model. You can either increase your savings to make sure there is enough available to cover the additional years of retirement, or you can follow the portfolio income method.
Another advantage to the portfolio income method is that your retirement savings will never run out because you’re not having to withdraw money from your nest egg each year. So there’s no need to worry about saving more to cover these additional retirement years. And the math works the same. If you want to earn around 80% of a $100,000 salary, you need your portfolio to net $7,000 in income each month.
How Much Money Do I Need to Retire at 55?
Retiring at 55 is an entire decade earlier than the standard 65-year retirement age. That’s 10 additional years to fund.
One potential option for retiring at 55 is an annuity. Annuities are funds that you pay into now in return for a guaranteed income in the future. The amount you pay depends on your current age. For example, if you’re 40, and you want to retire at 55 with $100,000 per year for life, you would need to invest $850,000 now. If you’re 55, and you want to retire now with $100,000 per year, you would need to invest around $1,778,000.
Of course, the portfolio income method is flexible enough to work with retirement at 55 as well.
How Much Money Do I Need to Retire at 50?
At this point, the 4% rule becomes risky. After all, the 4% rule is intended to make your retirement savings last around 30 years. What happens if you live to be 80 or older? What if the money runs out?
Using the portfolio income method, this concern is moot; with proper management, you’ll continue to receive income from your investments for the rest of your life. And you have options to pass those income-generating assets to the next generation, have the assets sold, or even have the assets donated.
How Much Money Do I Need to Retire at 45?
It’s difficult to retire at 45 using a traditional retirement savings method. In many cases, there isn’t enough time to accumulate enough savings to fund 40+ years of retirement.
However, as with the other retirement ages, you could still retire at 40, earning $80,000 per year if you have an income-producing portfolio that generates around $7,000 per month.
How Much Money Do I Need to Retire at 40?
It is possible to retire with a $100,000-per-year annuity at 40. You would need to invest $2.5 million upfront to make that happen.
Otherwise, the portfolio income method still works here. Furthermore, if you decide to take a part-time job, you could get by with less monthly income from your assets.
How Much Money Do I Need to Retire at 35?
At 35, many careers are just starting to take off. But there are still some people who are tired of the rat race and ready to retire in their 30s. You could make this work through a combination of minimal living and income-producing assets.
For example, you might live rent-free in a tiny house with low maintenance and utility costs. This minimalist lifestyle might only cost $2,000 per month. Investing in a high-value market, like Los Angeles, you could easily net $2,000 per month on just a few rental units.
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