It seems like such an easy question to answer. Of course the answer varies from person to person, but let’s just say that you know what you need to have when you retire. If you would like to retire with an annual retirement income of $50,000, you are going to need to have roughly a million dollars at retirement age. This assumes that you are able to earn 5% on your investments during retirement and that you don’t touch the principal. With inflation as a consideration and additional variables out there, maybe it’s better to shoot for $2 million at retirement age. That would give you $100,000 per year without cutting in to your principal.
Let’s just assume that you want to be able to draw $50,000 per year once you retire. If you want to retire at age 62, you should have about 62,500 put away at 30. Now, that assumes that you aren’t saving any additional money between now and age 62. The reality is that you will be putting money away for the future via your 401k, or other retirement savings vehicles. So, 62,500 could be considered worst case scenario if you want to have $1,000,000 by the time you retire. The other big assumption here is that you are earning 9% on your money. That’s not really a very unrealistic expectation if you are in index funds.
If you don’t have 62,500 put away by the time you are thirty, don’t sweat it. You have a ton of time to catch up, but you have to start NOW. The easiest way to do that is to start putting more away in your 401K through your employer, or start contributing the maximum to a ROTH ira each year. If you only have $7500 at age 30, but start putting away only $400 per month in your tax deferred account, you can still reach $1,000,000 at age 62! For every month you delay your saving, it’s going to be much harder to reach your goal, so start now.
If you want to play with some various scenarios to see how much you’ll need to save in order to retire comfortably, you can use this calculator at CNNMoney: http://cgi.money.cnn.com/tools/millionaire/millionaire.html
And where should you be at various ages along the way? (Assuming no futher contributions @ 9% interest)
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