Thursday, June 21, 2007

Target savings at retirement

How much savings do you need at the time of retirement?

Here is my rule of thumb:

* calculate the annual sum that you need to cover your living expenses
* multiply it by 25 times

Assume:

* you retire today
* you have a fully paid home
* your children are all grown up
* you need $1,000 a month for your living expense
* you will need a capital sum of 25 X 12 X $1,000 = $300,000

You can invest 80% of the capital sum (say $240,000) to buy a life annuity (which is likely to give you $1,000 a month, but it depends on your age) and keep the remaining 20% ($60,000) as a contingency fund.

If you retire in 10 years time, you need to add inflation to the target sum at the rate of (say) 2% per year. If your target sum is $300,000 today, it will have to be $366.000 in 10 year's time.

Read this FAQ on Life Annuity.

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