Using Simple Rules to Predict your Retirement Needs

By Pinyo, on December 6, 2007

In prior posts, I shared some financial math tricks and demonstrated a quick way to calculate your retirement needs. Now I am going to put the two together and use these rules, along with some historical inflation data, to give you a quick estimate of annual income needed for a comfy retirement.

Historical inflation data from InflationData.com

The graph above shows historical inflation rate from 1913 to 2006. Here are some quick factoids:

• From 1913 to 2006 U.S. inflation rate averaged 3.4%
• From 1996 to 2006 U.S. inflation rate averaged 2.5%, slightly lower than the longer term average
• 10 consecutive years with the highest inflation rate was between 1973-1982 at 8.8%
• 10 consecutive years with the lowest inflation rate was between 1924-1933 at -2.6% (period spanning the Great Depression)

Using the Rule of 72 and Rule of 115 and inflation rate of 3.4%, we can estimate that:

• We need 2x our current income to retire in 20 years (72 / 3.4 = 21)
• We need 3x our current income to retire in 30 years (115 / 3.4 = 34)
• We need 4x our current income to retire in 40 years (72 / 3.4, twice)

After reading Chief Family Officer’s comment, I concluded that: A better way to estimate is not to base it off your current income, but off your current estimated annual living expense. The reason is simple, some people make $50,000 a year and could live on $25,000, and some people make over $100,000 but spend more than they earn every year.

Of course, you can apply the 80% rule that said, you only require 80% of your pre-retirement income to live comfortably in your retirement, which will lower your retirement needs by a bit. I will discuss the reasoning behind the 80% rule in a future post.

More about math rules, inflation, and retirement needs:

• Use the Rule of 72 to Understand Compound Interest @ GenerationXFinance
• Retirement Income Rule of Thumb Debunked @ Consumerism Commentary
• 5 Steps to Early Retirement @ Free Money Finance
• 3 Retirement Income Variables to Consider @ Advanced Personal Finance
• A Penny Saved is Worth More Than a Penny Earned @ Cash Money Life

Carnivals:

• This post was featured in the Link Mash-up 13 hosted by TheWildInvestor.com. For more information, please visit the Business/Finance Link Mash-up.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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