A 25 year retirement with a pre-tax annual income of $100,000 and an annual inflation rate of 2.5% will cost a total of $3,415,776.
If you can achieve an annual return of 4.0% on your invested capital during retirement, you will need $2,111,577 of capital at retirement's door. That's just the price of admission. Additionally, if you want to create a reasonable cushion, a reserve so to speak, just in case things do not go as planned, you will need another $308,328.00. That brings the total to $2,419,905.00.
That's just the math. Any calculator can tell you that. How do you get there from here?
It all starts with a plan. That plan must effectively address three critical areas.
1. Savings rate
2. Personal savings ability
3. Projected investment return
An effective plan thoughtfully navigates the tradeoff between living today and sacrificing for the sake of tomorrow. The earlier you start saving, the smaller the required sacrifice. If you get started saving later in life you may have to retire a bit later to keep the savings rate affordable.
Your projected investment return must be based on a reasonable return estimate that is achievable based on an asset allocation plan that you are willing to follow over time. In other words, if you are projecting a 10% investment return over time then you must be invested in asset classes that projects a return that high. (stocks) Of course, that may not be a prudent choice.
Finally, an effective plan requires as much time as possible to leverage your savings and investment return into wealth. Therefore, it is best to get started right away. Don't let time slip away.
Remember, you get the retirement you can afford not necessarily the one you dream about.
Contact me if I can help.
Keith Donnell is a Certified Financial Planner Professional with 30 years of experience helping people effectively build wealth for retirement.