How Much Money Do You Need To Retire From Your Cooperative?
Do you know how much money it's going to take for you to retire from your cooperative comfortably and then to remain retired comfortably? That's a loaded question and one that I find no one seems to have the answer to. What if I told you how to come up with that mystery number?
Wouldn't that be a great place to start when planning for retirement? I'm going to show you in a few simple steps to determine how much money you need to retire from your cooperative. There are a lot of things that can happen in life so this is a ballpark number but it’s also a great starting point. It gives you something to aim at.
Step 1
Imagine that you're retiring not in 20 or even 10 years, but at the end of this month. Imagine that next month is your first full month of retirement. How much monthly income will you need to sustain your lifestyle next month? Let's use $8,000 for this example.
Next determine what guaranteed monthly income you will have such as social security, military pension and subtract it from your desired monthly income. The monthly difference is the difference we need to make up with your investments such as your NRECA 401k, your R&S Lump Sum, an IRA. It could be any combination of these. You can find out your Social Security info at ssa.gov.
Desired Monthly Income = $8,000
Social Security Monthly at 62 (as an example) = $2,000
Retirement Pensions Monthly = $0
Monthly Difference = $6,000
You will need to produce $6,000 from your retirement savings monthly to sustain your lifestyle during retirement.
Step 2
I apologize for the simplicity in this step, but it's necessary in order to paint the entire picture. We established in Step 1 that you need to produce $6,000 monthly from your retirement savings. Now we need to make that amount a yearly amount.
Monthly Difference = $6,000
Months In A Year = 12
Yearly Amount Needed = $72,000
I told you that this was going to be simple. You need to produce $72,000/yr ($6,000 x 12) from your retirement accounts.
Step 3
If you are retiring next month and you need $72,000/yr from your retirement accounts use the number one (1) where it says "Years Until Retirement.”
But what if you are retiring in 10 years from now? That number won't be $72,000/yr. It will be $72,000 plus inflation. Read more about inflation and how it affects your retirement here.
Inflation historically averages between 2% and 3% per year. For this example we will use 2%.
Yearly Amount Needed = $72,000
Average Inflation = 2%
Year Until Retirement = 10
Yearly Amount Needed in 10 Years = $87,768
In 10 years from now we will need $87,768 just to have the same purchasing power as $72,000 has today. When calculating retirement needs it is crucial to include inflation. This is a time value of money calculation performed on a financial calculator. Google "financial calculator" or download a financial calculator app to your phone. This is the info to input in the financial calculator for the example we’re using:
Key Strokes:
Make the keystrokes exactly as indicated. Don't hit equal sign and if you make a mistake start back at step 1.
1. f, CLx
2. g, 8
3.Yearly Amount Needed, CHS, PV... in this example 72000, CHS, PV
4. Years Until Retirement, n... in this example 10, n
5. Inflation rate, i... in this example 2, i
6. FV
Using my example numbers you should have come up with $87,768
Step 4
Retirement can last 20 to 30 years. For this example we will use 20 years. If you plan on retiring at 55 use 30 years here instead of 20.
Yearly Amount Needed in 10 Years = $87,768
Estimated Retirement Length = 20 Years
Amount Needed To Retire = $1,755,360
Now what just happened? We took the amount you needed in 10 years and multiplied it by the estimated length of your retirement of 20 years. $87,768 x 20 = $1,755,360
What if we were retiring in 1 year? $72,000 x 20 = 1,440,000
There you have it. That's your personal retirement number. If you have that much money between your 401k and your R&S Lump Sum, congratulations!
Remember... this is only a ballpark number but it’s also a great starting point to see if you are on track for your retirement.
If that's not clear enough shoot me an email and I'll help you figure out your number. bcoleman@8020finacialservices.com
You Need A Plan
A goal of retiring - without a plan - is simply a plan to run out of money. At 80/20 Financial Services we specialize in helping cooperative employees plan their retirement. We can show you how to turn your 401k and your R&S lump sum into a stream of income just like when you were working while also helping you turn that money into something that could change your family legacy.
If you're age 50 or over and still in the accumulation phase (pre-retirement) we can help you figure out where you need to go and how to get there. If you are retired or nearing retirement, we can create a plan which will outpace inflation and accomplish any other retirement goals you might have.
The consultation is free and without obligation. Contact us to set up a consultation.
For more articles about retirement planning and investing click here. Also for a great read on the 80/20 Principle check out this book.
Thanks for reading!
Brian Coleman/Electric Cooperative Retirement Specialist
80/20 Financial Services is an Independent Registered Investment Advisory Firm. We help Electric Cooperative Employees create their retirement income and investment plans.
Photo by Roman Mager on Unsplash
