Determining how much money you will need to live comfortably when you retire is the basic premise of retirement planning, and it really shouldn't be any more complicated than that.
Multiplying By 25
A good rule of thumb according to many financial experts is to base your calculations on what you spend, rather than what you earn. For example, if you earn $80,000 a year but don't spend anywhere near that amount, you don't need to base your figures on what you make.
Despite the fact that you won't necessarily have the same expenses when you retire that you have now, you should reckon on spending about the same amount. And once you have a figure that you feel you will spend each year during retirement, you should multiply it by 25. The result is the ideal amount of money contained in your portfolio to see you comfortably through retirement.
Don't Forget Social Security
You can get a useful and accurate idea of how much to expect in social security when you retire, by using the easy to use feature on the social security website. Your situation may be that social security is only a part of the funds that you have to live on when you stop working; you may have a work pension, money coming to you regularly from a rental property, or other steady sources of income.
By reckoning in everything, you can determine how much money you will have to take from your portfolio every year. For example, you will need $35,000 from your portfolio if your goal is to live on $60,000 a year and $25,000 of that will be coming to you from a combination of pension and social security income.
Use a Retirement Calculator
One of the most useful tools when it comes to figuring out retirement planning is a retirement calculator, and you can find these on various financial websites. The calculator basically crunches the numbers for you, in much the same way as the example above, and allows you to use certain variables such as the amount of social security, your income and the age that you anticipate retiring at.
One way to look at retirement planning is to see if your numbers are such that you can reach the ripe old age of 99 and still have money left in your retirement portfolio.
Save and Diversify
Of course, it's never too early to start saving for retirement, and saving can be anything from cutting back on meals out to spending less on your annual vacation. Your income goals, level of risk tolerance and your age should all play a part in determining how you invest the money in your retirement portfolio. The percentage of your portfolio that you should keep in stocks should be the same number as your age subtracted from 100, although of course this is only a rule of thumb. In other words, if you are 35, you might want to have 74 percent of your portfolio invested in stocks.
Omni Fidelity Associates