As we pinpoint how much of a nest egg (retirement savings) we need to grow by the time we retire that will initially generate $2,600 per month after taxes. We need to take into consideration inflation and ensure that we don’t outlive our savings. You build a retirement nest egg by diligent, sound investing over an extended period of time.
Identify your risk tolerance for investing. Are you conservative, moderate, or aggressive? If you’re conservative, your withdrawal rate will be 3 percent. If you’re moderate, your withdrawal rate will be 4 percent. If you’re aggressive, your withdrawal rate will be 5 percent. In our example, we’ll assume that our risk tolerance is moderate.
Multiply your monthly retirement income deficit by 12-months to calculate the annual income needed initially during retirement. $2,600 (RID) times 12-months equal $31,200. Divide the annual income by .80 ($31,200 divided .80 = $39,000). This figure represents the gross amount you’ll need annually to net $31,000 per year or $2,600 per month after taxes. Divide the gross amount ($39,000) you’ll need initially during retirement by .04 (moderate risk tolerance) to determine the size of the nest egg we’ll need to accumulate. In our example, we’ll need a nest egg of $975,000 to generate a monthly income of $2,600 after taxes. My calculation ensures that you don’t outlive your savings and that you leave a legacy to your heirs.
In our example, assuming an average rate of return of 10-percent, we’ll need to save $834 per month, excluding employer’s matching contribution to amass a nest egg of $638,625 20-years from now. Allow these figures to motivate you to take action sooner rather than later when it comes to retirement planning. There are other alternatives that I’ll share in future articles that will ensure that you live a comfortable retirement.
(Mortgage and Money Coach Damon Carr is the owner of ACE Financial. Damon can be reached at 412-216-1013.)