This episode of the Finance Flash Go! podcast is going to cover estimating how much money you need to retire.
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How much of your retirement savings can you take out for living expenses each year in retirement without running out of money? That’s the biggest piece of the puzzle to estimating how much of a nest egg you will actually need.
A classic financial study demonstrated that if you withdraw 4% of your retirement savings each year during retirement, your nest egg will have the best chance of living as long as you do. This means you will not run out of money before you die. You withdraw 4% per year and the rest of the money is working for you in your investments to keep replenishing so that you have enough for the golden years.
People are usually surprised at this concept as they imagined that they would be able to withdraw a higher amount per year – I know I was!
This allows us to create a magic equation for retirement savings.
Once you have figured out your goal yearly expenses for retirement ($X) and a safe withdrawal rate (4%). The following simple equation will then allow you to compute how much of a nest egg you need:
4% = $X/Nest Egg
So, say you predict your monthly expenses to be $10,000. Your desired yearly withdrawal amount is then $120,000 ($10,000 x 12).
Some back of the envelope math will show you that you then would need a nest egg of $3 million ($120,000/4%). Also 25 x amount you want/year. Was this more or less than you were expecting?
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