The Magic Number for Retirement: It’s Not What You Think

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Retirement isn’t an age; it’s a financial number. It’s the amount of money you’ll need to enjoy the kind of retirement you’ve been dreaming about. But for most folks, deciding that amount can seem scary or overwhelming. That’s why I created the Retired Inspired Quotient (R:IQ).

The R:IQ is an online tool you can use to figure out how much money you’ll need to save for retirement and how long you’ll need to invest it. This tool factors in things like inflation and the interest on your investments. It also figures in the withdrawal rate on the money you’ll use when you retire.

I know these terms can be a bit fuzzy, so let’s define them:

  • Inflation: This is the rate (or percentage) that prices go up every year. For example, a gallon of milk that cost $3.43 in 2013 was $3.85 in 2014. Why does this matter in retirement? Because when you retire, everything will cost more, so you will need more money to pay for things in the future. 
  • Interest: That is the rate (or percentage) your investment grows over time. For example, $1,000 invested for one year at a 10% rate of return would earn you $100. The longer you keep money invested, the more interest you earn.
  • Withdrawal rate: This is the rate (again, think percentage) at which you will take money out of your retirement savings. You always want to take out a lot less than you’re earning in interest. That way you can live off the growth and never drain your savings.

To use the R:IQ tool, you’ll enter in the following information:

  • Monthly budget (how much you think you can live on when you retire)
  • Working years (how many years until you want to retire)
  • Amount of money already saved (401(k) money, savings, Roth IRA, etc.)
  • Any debt you currently have

The tool takes this information and tells you how much money you need to save every month to live like you want in retirement.

Let’s look at an example:

$5,000 for a planned monthly budget in retirement
+ 20 years until retirement
+ $125,000 already invested in a 401(k)
+ No debt
=Your dream retirement number to reach is $1.7 million

The R:IQ tool would also tell you that you need to invest about $333 a month for the next 20 years to reach that number. See, a dream retirement is possible!

Play With the Numbers

The great thing about the R:IQ tool is that you can play with the numbers to see how they affect your retirement dollars. For example, if you changed the number of years before you retired or the monthly budget you want, you’d get different answers:

$5,000 for a planned monthly budget in retirement
+ 15 years until retirement
+ $125,000 already invested in a 401(k)
+ No debt

In this example, shortening the years before you retire (from 20 to 15) means you have to save a lot more every month—$1,268! That shows the power of compound interest over five years!

Now What?

Playing around with the numbers and the R:IQ tool can be fun, but it won’t help you get closer to retirement until you take action. Here are three things you need to do:

  • Create a monthly budget. A monthly budget is like a GPS. It gets you where you want to go—to that dream retirement. Every month, you have to tell your money where to go so you don’t waste it on something stupid. That budget needs to include money you set aside for retirement.

Related: Create a Budget In Less Than 10 Minutes with EveryDollar. Learn More

  • Get out of debt and stay allergic to it! Debt is retirement quicksand. It will keep you from your retirement dream. Before you invest in a 401(k) or Roth IRA, you must pay off all of your debt first (except the mortgage). Then work on funding your retirement and paying off the mortgage. Can you imagine how much money you could save every month if you didn’t have any debt? Talk about a great retirement!
     
  • Get professional advice. You wouldn’t try to fix a broken tooth by yourself. You’d go to a dentist who has the skills, training, and experience to do the job. The same applies to investing for retirement. You need to talk to a professional advisor about the best investment options for your situation. If you need help finding one, try SmartVestor today.

Remember, reaching your dream retirement goal is up to you. You control your spending. You decide to say no. You determine how much you are willing to sacrifice now to enjoy the rewards later. If you work your plan with real effort, you will get real progress. Your discipline will pay off down the road when you reach that magic retirement number!

money | @chrishogan360