Many people get overwhelmed when they hear about how much money you need to retire. They feel that it is only for the very wealthy or someone with a large savings account.
But what most people don’t realize is that your retirement income doesn’t necessarily come from one source.
Some good sources of income will always pay well, but you have to be willing to work to earn them. For example, investing in stocks or bonds can yield significant rewards over time, but requires some education and understanding of these markets.
And while having a big savings account is great, things like living expenses make it impossible to save as much as you want to truly enjoy yourself later in life.
This article will talk about the different types of income that you can add to Your Financial Life and determine an average cost per unit of each. Then, I'll tell you just how much cash you would need to achieve true financial freedom in terms of spending your life traveling and doing fun things.
Many people feel that they need their daily job to live, so they never truly retire. Others believe they can “retire in their dreams” but not actually do it because they don’t have enough saved up!
The truth is you will almost certainly be able to retire at some point, but it won’t necessarily be easy.
And just how much money would you need to save for retirement?
Most experts agree that for every person over the age of 50, we should aim to achieve an income of at least 2-3 times our annual living expenses (ALEX) as a baseline.
This means that if your yearly ALEX is $20,000, then your savings goal should be around $6,000-$9,000 per month or about 1500-2250 dollars per day.
That’s just for general spending, not including extra costs like mortgage or rent, utilities, groceries, etc..
If you have very few major costs, such as rent or mortgage, health insurance, and other loans and credit cards, it is easy to know if you could retire today!
By adding what you’re able to earn now to what you’d like to keep earning in retirement, we can determine just how much money you need to make per year to achieve your goal of retiring.
This way, you don’t have to worry about whetheror how much you’ll be able to spend in retirement given that you’ve determined you’ll find enough income for your needs.
Even if you make just $1,000 per month from passive income sources, you’ve got a solid retirement fund!
Most people underestimate how much money they need for retirement at least twice during their working years. First, when employers offer early retirement programs, most people don’t take them because it looks like such a small amount of money.
But after factoring in all of the other benefits of early retirement, that monthly savings can add up quickly.
Second, many people don’t consider the growing costs of health care as they approach retirement. If you are still covered by employer-sponsored insurance, great! But what about getting individual coverage later? Or paying higher premiums due to skyrocketing medical expenses?
A more appropriate way to look at this is to determine how much you want to spend on retirement, not how much you have saved for it. A better measure is how much excess money you would like to keep in reserve instead of spending every dollar on retirement.
This additional savings can be built into the budget today by investing prudently. It also doesn't need to be spent on immediate things, like buying a boat or taking expensive vacations. Instead, it can be invested for your retirement down the road.
If you are thinking about retiring, then you should know how much passive income you need to do so! While some people talk about living off of your savings or off of the returns from your investments, that is not really practical for most people.
Most individuals cannot live off of their savings alone nor can they rely fully on investment returns. This has something to do with the average person having a job and spending money in entertainment, shopping, eating out, etc.
This doesn’t mean you can’t enjoy these things after retirement, but you will have to balance them between being active (spending time at work, traveling for business) and being passive (hobbies, reading, TV).
Also, many things you purchase today require energy to make such as electricity to run an oven or power to connect to the internet. All of this activity requires energy which creates more expensive bills during your retired years.
It is best to understand how much passive income you will need well before retirement to ensure you don’t spend all of your savings early on. Also, plan for possible cost overruns when investing.
The second key factor in determining how much passive income you need is how long you intend to live under your current spending pattern. If you expect to spend the rest of your life living within your means, then having a high savings rate is not as important.
You want enough money left over at the end so that you can maintain your lifestyle once you stop working. This is typically considered an average of 5-10 years depending on what level of luxury you desire after work.
If you think you will live beyond this period, then ensuring you have enough for early retirement makes more sense.
A good way to determine how much retirement income you need is by looking at your health now, and what kind of health you want to have in the future.
Most people think that they will be healthy as they get older, but this isn’t always the case. Health can be influenced by many things — genetics, lifestyle, diet, and environment being some of them.
By having less than enough savings, you are investing in yourself out-of-pocket! This doesn’t make sense if you don’t consider the price of health care down the road.
It is important to know what kind of health you want for yourself. If you want very long term health, then saving more may not be the best idea.
On the other hand, if you just want to enjoy life while you are young, spending money right now on healthier habits is a better investment.
Healthy eating, exercise, sleep, and avoiding debt will all contribute to keeping you well into your golden years.
As we mentioned, personal wealth is not dependent on having a large income or owning expensive luxury items. It’s made up of two components: equity in the home you live in (or plan to live in) and financial assets such as stocks, savings, and retirement accounts.
The amount of money you have access to depends on the size of your wallet! How much money you have in your wallet comes down to how well you manage your expenses.
You can spend whatever you want if you have a lot of cash left over at the end of the day, but that won’t make much difference when you're talking about retiring early. If you don't save enough money for your future self, you'll be sacrificing now for a better tomorrow.
A good rule of thumb is to assume that it will take 10 years before you can truly consider yourself retired. That means spending less than 10% of your gross monthly income should be your goal. Gross monthly income includes what you earn from your job plus any other sources of income like social security, pensions, etc.
Gross monthly income can easily add up fast, which is why saving effectively is so important. Also remember that life happens – it's impossible to predict things like medical emergencies or family issues that may cut into your retirement savings.
A good way to determine how much retirement income you need is to calculate what level of savings you’ll have after your kids are grown.
Most financial advisors recommend saving enough for your children's education, as well as their own personal lives. This is typically two years' tuition at a college or university, one year in living expenses for each child, and anything else they want to buy themselves.
This can be tricky when parents don't live close together, but if you do it right, in five-to-ten years time your kids will have more money than you!
By spending wisely now, these things become free gifts that help you retire even faster. Read about some ways to save here.