One Money Question to Rule Them All: How Much Is Enough? The age old question, how much money do I need for retirement? Before you answer that, you need to look at savings. There is the basic rule of thumb from an old book by Elizabeth Warren, All Your Worth: The Ultimate Lifetime Money Plan, is: Spend 50 percent on needs, 30 percent on wants and 20 percent on savings.
My friend Doug Massey has created a very nice formula which allows you to estimate whether you have enough money to retire. Here’s the formula:
Age * Net Worth / Annual Expenses
If the result from this formula exceeds 1,000, you have enough money to retire.
Let’s assume you are 50 years old and have amassed $500,000. We will assume that your annual expenses are $30,000.
So (50 years old) times (a net worth of $500,000) divided by ($30,000 a year in expenses) equals 833.33
That’s less than 1,000, so this formula suggests that you need to amass more wealth… that is: keep on working
Using this same example, a 60 year old with the same other data ($500K in net worth and annual expenses of $30K) would come to 1,000. That means this person can retire.
If you are trying to determine whether or not you and your significant other can retire you would use the average of your two ages.
Try this yourself. Few among us have enough money to retire early. Living below your means and saving and investing as much money as you can should always be your goal.