How much do I need to retire?

When preparing for any financial goal, it’s easiest to start with the end in mind. With some things, like house or car down payments, the number is somewhat easy to peg.

But funding decades of fun? It’s harder to figure out any one number for that. How much will semiannual cruises cost? Or snowbirding in Florida? Here are a couple of common (and easy) ways to get started.

The 80 percent rule

If the prospect of tallying each cost and expense you’ll incur in your Club Med years is intimidating, fall back on this old standard. For years, experts have said that we’ll probably want between 70 and 80 percent of our pre-retirement income in retirement.

Why not all of our current income? Well, this rule of thumb relies on a few assumptions, namely that your expenses will be considerably less in your golden years than they are currently. Later in life, you probably won’t be paying for childcare or college, and you may have finished paying off your mortgage or other large debts. That said, if those situations don’t apply to you, you may require more of your income in retirement and may want to up your percentage.

To calculate how much you’d need in retirement, then, you’d take 70 or 80 percent of your current income and multiply it by at least 20, the average amount of years Americans live after they retire.

So, if you earn $50,000 today, you’d want to have at least $700,000 to $800,000 to draw on in your retirement.

Multiply current spending by 25

Rather than focusing on your current salary, some financial advisors encourage clients to hone in on their spending. If you currently spend $30,000 a year, then, you’d want to have at least $750,000 in retirement.

While 25 might seem like an arbitrary number, it’s grounded in another retirement planning rule of thumb: the 4 percent rule.

The 4 percent rule is a common estimate for how much someone can withdraw from an investment portfolio without touching the principal. That’s important because the principal, or the base amount of money you have when you retire, is what will generate most of the returns you’ll rely on without a job for income.

We multiply expenses by 25 because that’s the fastest way to calculate the value you need to end up with to make an annual withdrawal equal to your current expenses. If you have $750,000 in retirement savings, for instance, a $30,000 withdrawal is equivalent to 4 percent of your total.

The 4 percent rule operates on one big assumption, though: Over the long term, it assumes an investment portfolio will earn at least 4 percent annual returns. While that’s very reasonable for an S&P 500 index fund, which historically earns 7 percent each year on average when adjusted for inflation, chances are your entire portfolio won’t be in stocks when you retire.

You’ll probably have more bonds and bond funds, which offer more stability in value but lesser average returns. That means a more conservative retirement portfolio with a greater percentage of bonds may not provide the level of returns necessary to maintain 4 percent withdrawals over your retirement.

If you’re concerned about investment earnings not reaching at least a 4 percent threshold, you might consider using 3 percent as your base instead. In that case, to get your retirement portfolio value target, you’d multiply your current expenses by 33.33 instead of 20.

(This article written by: John Schmidt)