Retirement is something that a number of us think about at some point in time of our working careers or even those who have not started working.
We work hard, we save money, we invest wisely, live a frugal and active lifestyle. We often wonder how much we actually need for retirement and worry about running out of money before we depart from this world.
There’s actually a very simple method of calculating how much you need to retire. Turns out that it all boils down to one thing ….
Your savings rate as a percentage of your take home pay.
Your savings rate depends on how much you take home and how much of it you spend. While we know these 2 numbers pretty easily just by checking our savings account, the relationship between the 2 will decide the road to our retirement.
If you spend all or more than your income ( 100% ), you will never be able to retire unless someone else does the savings for you, you strike the lottery, or inherit great wealth. Even then it is no guarantee it will last you throughout retirement.
If you spend nothing from your income and you can maintain this after you retire, you will be able to retire right now. Congrats !!!
These 2 are the extreme ends of the spectrum and most of us will fall in between. As soon as you start saving money and putting it to work in investments, it starts earning more money all by itself. The earnings will continue to earn more money and after some time it will grow to quite a tidy sum.
Once this income is enough to meet your living expenses, you can leave the rest to continue earning to keep up with inflation, you are all ready to retire.
If you are a saver and you happen to be saving around 50% of your take home pay, you will be ready to retire in about 15 years from the time you have started working.
How did i derive this figure ?
Here is a simple tool you can use to check how long your working career will be in order to retire.
It is that simple. The main factor in determining your retirement or working career is solely based on the savings rate, how much savings you already have and your investment return.
Your level of income does not really play a part here as what many thought as is important. This is unless you invest or save all the additional income you receive when you get a pay rise instead of increasing your level of spending that usually comes along with a pay increase. This will then increase your savings ratio which will help in reducing the total number of working years.