Retirement Formula is a simple way to determine how much you need to be setting aside each month so that you can retire in the style you desire and not live out your golden years in destitution. Most retirement formulas are a simple algorithm where you input data such as how long until your retirement, your current income, the income you'd like to have after you retire, the interest rate you expect to earn on your savings, and the formula kicks out a number. A retirement formula can be a great help in future planning but it doesn't take the place of a good, qualified financial adviser.
There actually isn't one formula. Different people have different formulas. You can find them as web-based tools or they might be spreadsheets or even just instructions to use with a calculator. The former tend to be either very simplified and don't give good results or very complicated since interest over time calculations are difficult. And retirement formulas aren't just how much to put away each month. They could be to calculate how much of your assets you can withdraw each month during retirement assuming a certain lifespan. Inflation, interest rates and life span all come into these formulas. You may have guessed that you have to guess at some or all of these figures. Again, a financial adviser could be an invaluable tool in planning for retirement or even independent living retirement planning since they will have better answers to some of these questions.
Why use a retirement formula? Because you want to enjoy your golden years and that requires money. Social Security is going insolvent and the age for full eligibility will have to be raised, benefits cuts, or both to bring it back to fiscal control. That is why planning ahead, perhaps using a retirement formula, is so essential. You may want to move to Arizona and spend your days golfing. Or more to Florida and watch the sun set from a Gulf coast beach house. You may wish to stay in the same house you raised the kids in or you may want something that requires less maintenance. You may want to travel, by RV or airplane and explore the world. You might want to go on luxury cruises. There is no exact formula for what you have to do during the time after you stop full time work. Some folks even pursue new careers knowing they don't have to live with only entry-level pay because of their savings.
Using a formula to calculate the amount of money you need to set aside for when you aren't working can be a helpful guideline. But some of the assumptions you will need to make about inflation, interest rates, and Social Security payments could be, for you, guesses at best. This is why in addition to the formula, you need to consult with a good, knowledgeable financial adviser. Pulling a retirement formula off the internet and putting in your best guesses is not a good idea for something as important as your future finances. Accountants say that no matter how much their retired clients have put away, they all worry about running out of money before they die. You don't want to be in that situation. Talking to a qualified, knowledgeable financial adviser can ensure you are not. You want to be able to live off the interest of your savings, not the principle. Then you can leave the principle to your children or favorite charities.
Plugging in guessed-at numbers into a retirement formula may be easy and quick, but easy and quick is not something you want to do when it comes to your future. It can be a guideline to start the conversation about how much to save and how much you can spend after you retire. You may find that your expectations are completely unrealistic and you need to rethink what you wish to spend or save. A retirement formula is best used as a direction, not a road map. For that you the advice of a financial adviser. He or she might also use a retirement formula but they will have the knowledge to put in better guesses as to rate of return, inflation, and other things you may not have even considered such as taxes.
A retirement formula is a start to financial planning but shouldn't be the end. Your golden years are too important to trust to a simply algorithm you found on the internet. Talking to a good financial adviser is a much better way to make sure you have the money on hand to enjoy those years after you stop working full time. With modern medicine retirees are living longer and longer so saving enough money to last a lifetime is essential.
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