Retirement is one of the hardest life events to plan for financially. Because there are so many variables that cannot be predicted, many people find that predicting the proper amount of money that they need to save is next to impossible. There are several different methods to determining a good amount of money that needs to be saved.
In order to figure out how much money a person needs to save for his or her retirement, a person or couple should start by determining their future yearly expenses. To do this, many people start by reviewing their current yearly expenses. While some studies have shown that a typical retired couple spends an average of eighty percent of their pre-retirement income every year that they are retired, other studies have shown that during the first ten years of retirement, a couple will spend about 120% of their pre-retirement income.
Because of these studies, many financial advisors tell their clients to plan on needing 100% of their pre-retirement income every year while they retire. Based on this, a quick solution to determining how much income a person or couple needs to retire is to multiply the amount needed every year by twenty. By doing this, a person or couple can withdraw four percent of their savings every year in order to pay for their expenses. Since many conservative investments have returned four percent or better over an average of twenty years, it is possible to assume that this amount of money would last forever.
The wrench in this plan, however, is inflation. Over time, prices for everything from groceries to transportation will go up. Predicting how much they will go up, however, is next to impossible to do. Historically, inflation rates have averaged between two and three percent. Recently, however, America has had two years with inflation rates of practically zero, but many financial experts are predicting that the country will experience inflation rates of between four and six percent soon.
Like with most retirement planning, the conservative approach is usually the safest one. To account for inflation, many financial planners tell their clients to expect an average rate of three percent a year. When withdrawing from savings, a person or couple should withdraw their pre-retirement savings the first year, then withdraw that amount plus three percent the following year. Continue to increase the withdraw amount by three percent every year.
In order to account for this, many people choose to save twenty-five times the amount that they plan to withdraw their first year. Other people choose less conservative investments.