When will you be able to retire? One school of thought holds that you should wait until your investment portfolio is 25 times the amount you’ll need. In Year One of retirement, you’ll withdraw 4 percent (1/25) of your savings. Each year after that, you’ll withdraw the Year One amount, increased annually for inflation.
Suppose, for example, you think you’ll need $80,000, pretax, for a comfortable retirement. You expect to receive $50,000 per year from Social Security and a pension. That’s a $30,000
shortfall.
Multiply that $30,000 by 25 to get $750,000: that’s how much you’d need to save, in order to meet your goals. You could withdraw $30,000 in Year One (4 percent of $750,000), then $31,000, 32,000, etc., in future years, to track inflation. This technique is designed to assure you that you won’t run short of money as you grow older.
