How much money do you really need to save to retire comfortably?
For many people, this question causes a lot of anxiety. On the one hand, you want to save enough so that you don’t run out of money after you’ve stopped working. Your retirement account should be large enough to cover you for the rest of your life and, if you so desire, leave some inheritance for your kids, grandkids, and anyone else important to you.
But at the same time, you don’t want to save so much that you can’t possibly spend it all during retirement. It’s a fine balancing act – ensuring you’re saving enough for retirement without undermining your quality of life right now.
Conventional wisdom is that you should save approximately 10% to 15% of your income each year. Most financial experts agree that if you save that much, you should be able to retire comfortably.
[article post=”2″]Of course, this is dependent on your personal goals and vision for retirement. For some people, that might be perfectly enough! But for others who want to travel the globe in their golden years, that budget might be stretching it thin.
Let’s explore some factors to consider in your retirement planning.
One of the reasons I like the 25X rule is because it starts from a budgeting perspective.
Compare that to conventional wisdom. Sure, it’s great to save 10% to 15% of your income each year, but that formula leaves you feeling… a little uneasy. Why? Because it doesn’t account for your retirement budget at all. It’s a one-size-fits-all solution, and we all know that life isn’t that simple.
Instead, the 25X rule begins with you.
First, you need to determine your estimated retirement income. For most people, this is 80% of their pre-retirement income. Let’s say that you earn $100,000 a year. By following this rule, it would assume that you would need $80,000 in retirement.
You won’t be paying income taxes or other job-related expenses. Also, by this point, your home and vehicles will likely be paid off, so your retirement income needs will be much less.
Whatever your retirement income goal is, you should multiply that by 25 (this is why it’s called the 25X – or 25 Times – rule).
So using this example, you would need $2 million to retire comfortably.
$80,000 x 25 = $2,000,000.
But how do you make sure your money doesn’t run out? How do you ensure that you don’t spend too quickly and deplete your retirement savings too quickly?
The second half of the 25X rule is that you should only withdraw 4% annually from that retirement savings pot.
By limiting yourself to a 4% withdrawal rate annually, your retirement savings will last for the rest of your life!
In short:
While it’s good advice to save 10% to 15% of your income for retirement, the reason I love the 25X rule is that it takes a budget-first approach.
[article post=”1″]In other words, you are saving for your specific budgetary needs.
Think about it this way: only you can determine what your retirement looks like. Do you want to travel? Do you want to learn new hobbies? If you live in the north, are you planning on purchasing a second house down south to escape the bitter cold winter months? Do you plan on collecting things (such as antique cars) during retirement?
The 25X rule provides stability because rather than saving for an undefined goal, the 25X rule helps us specify our goal savings amount. It’s impossible to follow the 25X rule without knowing what your projected annual retirement income will be.
It comes down to knowing how much money you’ll need in retirement.
For most people, 80% of their pre-retirement income will be perfectly fine and you can plan and save accordingly.
Here are some other factors to consider:
By taking all of these factors into consideration, you can approach your retirement with confidence!
Like with any piece of financial advice, it’s best to take the 25X rule with a grain of salt. It’s impossible for any “rule of thumb” to take every factor into consideration. For example, this rule doesn’t factor in sources of income outside of your retirement fund, such as pensions, social security, and part-time side jobs.
Another factor that is impossible to plan for is unexpected life events such as health issues that can incur hefty medical bills. It’s also impossible to predict what inflation and market performance will look like, but these are challenges that affect any retirement savings strategy.
To save for retirement, it’s important to begin getting your budget in order. This is key to increasing your financial confidence while keeping stress levels as low as possible.
Retirement might seem forever away, but I think we can all agree that time flies fast… and seems to be going faster.
The younger you start saving for retirement, the “easier” it will be with compound interest on your side. But don’t let that discourage you if you’re starting later. Remember, it’s better late than never, especially when it comes to retirement planning.
If you need some pointers on organizing your budget, I recommend checking out some of my previous budgeting articles. Budgeting is critical to improving your day-to-day finances, and it also creates a solid foundation for your retirement goals.
Do you have any other questions? I encourage you to join the TBM Family Facebook group to connect with other people focusing on their financial journey.
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I’d be interested in hearing how this would apply to 1) someone who’s not going to have a paid-off home at retirement (an increasingly common circumstance) and 2)young people just staring out who would have a hard time trying to project what their expenses could possibly be 40 years in advance.
I’m wondering how to determine my pre-retirement income if I’m 36 years old and will have roughly 30 more years until retirement. How do I assume what my income will be in 30 years based on career growth, inflation, etc., in order to determine the 25x rule? Or should I base it off of my current income?