Determining how much you’ll need for retirement is really fairly straightforward. You simply figure out how much you’ll need in the way of yearly income during retirement, then multiply that by twenty-five. This assumes that you’ll withdraw 4% from your retirement account each year, which will be invested in an appropriate mix of mutual funds and cash. If you want to be a bit safer, multiply by thirty-three, which will assume you’ll only withdraw 3% per year. This will increase your odds of outliving your money and accounts for stocks and bonds perhaps earning less per year than expected in the future – something economists keep predicting will happen and very well might if the government keeps growing and imposing all sorts of wasteful and protectionist regulations.

For many people, something around a million dollars is reasonable, which provides an income of about \$40,000 per year. If you have paid off your home and your cars, such that all you need to buy is food, clothing, and utilities, that is fairly reasonable. You will also probably want to save an additional \$150,000, or \$300,000 for a couple, to pay for medical expenses in retirement. So that puts minimum retirement savings at about \$1.3 M. To be more conservative, shoot for something around \$1.5 M.

So, the formula would be:

Minimum Retirement Savings = (Income Needed)*(25 or 33) + \$300,000

for a married couple. For a single it would be:

Minimum Retirement Savings = (Income Needed)*(25 or 33) + \$150,000

This all assumes that you have paid off your debts and all that you have are maintenance costs to keep and maintain your home, keep the lights on, and eat each day. Certainly that is the state you should be in before you retire and start living off of your savings. To really be ready for retirement, you should have done the following:

1. Pay off all credit cards and start using debit cards and cash for everything. You can’t afford to be paying out credit card interest rates.
2. Pay off your home and any other home equity loans and the like. You need to have the security of having your home free and clear so that it can’t be taken away.
3. Pay off any car loans. You don’t want to be worrying about a car payment.
4. Have a good plan for medical expenses, ideally with a back-up plan to Medicare. Hopefully Medicare will remain and help with your medical expenses, but it is good to have a back-up plan just in case benefits get cut, particularly with Medicare Part B plans that are a favorite target for cuts.
5. Pay off your student loans. These should have gone away before you bought your first house. Don’t go into retirement with loans.
6. Pay off student loans for kids and grandchildren that are in your name. You can’t afford to be paying off student loans for others while you’re in retirement. Get with your children and grandchildren and discuss how the loans can be paid in full before you enter retirement. Also, resist the urge to take out student loans for children after the age of about fifty-five. As extra incentive, let your children know that you’re coming to live with them should you run out of money.

Note also that this is the minimum amount of savings, and the more you save, the better your life in retirement will be. This is because extra money you have saved – that beyond the minimums – can be invested fully in things like stocks and real estate that will generate more income than the traditional cash-bond-stock portfolio that you would invest in if you just had the minimum. If you have just enough, you’d need to be conservative with your money, and thereby cut your income, because you could not afford to suffer a 40% market downturn as happens every decade or so. If you have extra money, you can have a portion of your portfolio invested in a conservative manner, then have the rest invested in equities and real estate. You can then use the extra income generated by those investments for things like travel and lifestyle.

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.