This is a question I get asked frequently. Up until now, I've never felt qualified to make a recommendation on this question. Not because I didn't have an opinion (no one could ever accuse me of not having an opinion), but because I was having trouble conceiving of a coherent explanation. Recently, a reader emailed me this very question and I proceeded to write her a very convoluted response (sorry Denise!) It turns out, I've been making this much harder than it needs to be.
- Figure out how much your annual retirement expenses will be, and
- Multiply this number by a number between 25 and 33, depending on your age (more on this below). That's how much money you will need to have saved to have a worry-free retirement.
- The "absolutely safe" initial withdrawal rate is 3%. (The initial withdrawal "rate" is the percentage of your portfolio that you can take out the first year for living expenses. Every year after that, you would take out that that dollar amount, increased for inflation.) There was no historical 50-year period where you would have outlived your money using a 3% withdrawal rate.
- A 4% withdrawal rate could very likely carry you through 50 years. Historically, there would have been no period where it would not have lasted at least 33 years.
What does this mean to you? How can you translate this into something simple for retirement planning:
- If you want to retire in your 40's (with potentially 50 retirement years out in front of you), you will be extremely safe if you have accumulated 33 times your annual expense budget.
- If you want to retire in your 60's (with potentially 30-something years in your retirement), you will be extremely safe if you have accumulated 25 times your annual expense budget.
- (For retirees in their 40's to 60's the extremely safe number is somewhere in between.)