Previously, I demonstrated a way to calculate your retirement needs. Now I am going to show you how to use a popular math trick, e.g., the Rule of 72, along with some historical inflation data, to give you a quick way to estimate the annual income needed for a comfortable retirement.
Historical Inflation Rate
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 Math Rules to Predict Your Retirement Needs
Using the Rule of 72 and the Rule of 115 and inflation rate of 3.4%, we can estimate that:
- We need 2x our current income to retire in 21 years (72 / 3.4 = 21)
- We need 3x our current income to retire in 34 years (115 / 3.4 = 34)
- We need 4x our current income to retire in 42 years (72 / 3.4, twice)
Refining Your Estimate
Another thing to consider is calculating based on your current income might not be the best method. A better way to do the estimate is to base it off your current estimated annual living expense — specifically, picture yourself retiring today, how much money do you think you need? The reason the expense method is better than the income method 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 that every year.
If you don’t have a good idea on how to estimate your expenses, you can apply the 80% rule. The 80% rule simply estimates that you will need about 80% of your pre-retirement income to live comfortably in your retirement, which will lower your retirement needs by a bit.
More about math rules, inflation, and retirement needs:
- Use the Rule of 72 to Understand Compound Interest at GenerationXFinance
- Retirement Income Rule of Thumb Debunked at Consumerism Commentary
- 5 Steps to Early Retirement at Free Money Finance
- A Penny Saved is Worth More Than a Penny Earned at Cash Money Life
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.