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Using Simple Rules to Predict your Retirement Needs

December 6, 2007 by Pinyo.

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 Rate

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:

Carnivals:

4 Comments

  1. gravatar
    Patrick, 6. December 2007, 7:05

    Great article! You really bring home some relevant points in an easy to understand manner. I think I’m a little far off for an accurate estimation of my needs, but this is great for a rule of them estimation.

    Thanks for including my link as well. :)

  2. gravatar
    Pinyo, 6. December 2007, 7:40

    Thanks Patrick. I guess I am beginning to find my sweet spot. Yeah, this is a very rough estimate, but it does show the impact of inflation on your wealth. Scary.

  3. gravatar
    FMF, 7. December 2007, 5:16

    Thanks for including my post!

  4. gravatar
    Make Friends, Earn Money, 12. April 2008, 10:09

    I like this rule “current estimated annual living expense” I think it is a lot more accurate and reflective of future retirement financial needs

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