When it comes to retirement, it seems there are a ton of “rules” to understand. There are many different perspectives on what one needs to do in order to thrive in retirement and make their savings last a lifetime. To determine the amount you need to have in saved, we must first consider the retirement income desired. For this, we use the 4% rule.
Using this rule, a retiree would draw 4% of their portfolio the first year and then adjust for inflation in the years remaining. For example, let’s say you have a portfolio of $1.5 million and inflation is 2%. Upon your first year of retirement, you would take out $60,000. Then your second year you would take out $61,200. Then your third year you would take out $62,400 and so on. The 4% percent rule is a popular formula for figuring out how much you should save for retirement. Let’s say for example you wish to retire on $80K a year income, then you would need to save $2 million dollars.
Tip: An easy way to determine how much you will need to save using the 4% rule is it to multiply your desired income by 25. (i.e. $80k times 25 = $2,000,000).
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