30 Apr How Big is Your Nest Egg?
Knowing What you Need for Retirement
Many people ask how much money they need to save for retirement. This is an intimidating topic for most, but it doesn’t have to be that hard. Here’s how to find out if you will be comfortable in retirement.
Growing Your Nest Egg
First, ask yourself what income you can comfortably live on in today’s dollars when you retire. If you had no debt, how much money would you need to live? Make sure you are on track to eliminate debt, and have an established time line to be debt free.
Then calculate the future value of your investments needed to meet your current monthly expenses with 6% of the nest egg. You can do this with an investment calculator or with the help of a retirement planner. Here’s why 6% is important: When you invest for the long term you should expect a 10% average return on your investments with an aggressive portfolio. The stock market has averaged more than 10% over time, even including the Great Depression so this is not an unreasonable expectation. At retirement you should still expect 10% on your investments (on average – some years will be less, some will be more as the market fluctuates). If you receive 10% income in a year, and inflation reduces the value of your money by 4%, you would effectively be living on 6% of your investment portfolio. So, when 6% of your retirement portfolio equals your living expenses, you are ready to retire.
The numbers can get confusing but if you understand the general principles, you can begin to plan for the future. Simply knowing what your nest egg needs to be gives you a goal. Once you have a goal you can lay out a plan to achieve the goal.