Have you ever wondered what you’ve been saving all your hard earned money for? You probably answered with the obvious—retirement. But let’s be more specific; what is retirement? What does retirement mean? Does it mean quitting your job and spending the rest of your life on a golf course? I doubt you’d be golfing long before you’re just as board with golf as you were at the job you retired from.
I think a better description of retirement is “financial independence.” This means different things to different people, but I suggest it means you no longer HAVE to work, because your money works for you. It does not necessarily mean you quit working, but in retirement you only do the kind of work you want to do. To get there, you need to have saved enough money so that you can live off the earnings of the money you’ve accumulated.
So have you ever estimated how much money you’d need to save—your “Number”? Most people have no idea. It’s hard to stay motivated saving for some unidentified goal, but when you have a rough idea of your “Number,” saving and investing become a lot more interesting. This is because every time you put money away, you know just how much closer you are to reaching financial independence.
Figuring out your Number is less than perfect because there are many factors that are hard to predict. Variables like inflation, investment returns, health care costs and time in retirement, can dramatically change your Number. There are many more accurate ways to forecast how much you need, but here’s a simple formula you can play with today. Estimate how much money you would need to live per month. Multiply that by 12 and divide that by .04.
For example, let’s assume you need $4,000 per month to live happily ever after. Multiply that by 12 to get an annual income of $48,000. Then divide that by .04. In this example you would need $1,200,000 invested to earn $4,000 per month for as long as you live.
It’s a VERY rough estimate, but it can give you an idea of how much you need invested to live off the earnings instead of working. This calculation will show you how near or far you are from retirement. You should do a more comprehensive retirement analysis, because this estimate is very imprecise, but a rough estimate is better than none at all.