How To Calculate Your Retirement Number
How much will you need to retire? The easiest way to do this is use your current annual spending as a baseline, and then adjust up or down. Important things to consider:
Will you have a mortgage when you retire?
Will you travel more?
Will you still have dependents?
Will you have increased medical expenses as you age?
If you’re retiring early, will you have to pay expensive premiums to get health coverage?
Is your spending flexible in the event you have to cut back while the market is down?
Reminder that you will no longer be saving or investing when you’re retired, so that takes away a huge monthly expense :)
Determine the safe withdrawal rate you are comfortable with. A 4% safe withdrawal rate is standard best practice. This is the rate I use for my calculations. A 3% safe withdrawal rate limits your risk even more, and is sometimes favored by early retirees since they will be living off of their investments longer than the traditional retirement timeline. Choose what feels right for you and your risk tolerance.
Use this formula to calculate your retirement number using a 4% safe withdrawal rate:
Retirement Number = Estimated Annual Spending in Retirement x 25
Use this formula to calculate your retirement number using a 3% safe withdrawal rate: