We know we should save for retirement, but the question is how much? The answer relies on several factors:
- How much income you need
- When you are going to retire
- How long your money has to last
After trying several different strategies to find that magic retirement savings target, we came across a powerful approach that also happens to be remarkably simple. It is based on the work of researchers who run complex programs called Monte Carlo Simulations, which play out huge numbers of “what if” outcomes based on historical investment returns.
Introducing the 4% Rule and the Power of 25.
It’s not perfect, but the theory goes that in retirement you can tap 4% of your retirement assets per year and your money has a high probability of lasting, even with market fluctuations. If this seems low to you, keep in mind the volatility of the markets in recent years.
Using the 4% Rule, we arrive at the Power of 25, which says that your retirement savings target should be 25 times the income you want in retirement.
Why 25? Say you want $100,000 of income in retirement and you know you only want to tap 4% of your total retirement assets.
25 X $100,000 = $2.5 million
4% of $2.5 million is $100,000.
We hope using the Power of 25 to calculate your retirement savings goal can help you on your journey.