How much money do you need to retire?
This is a commonly asked question. If you have not asked this question yet, someday you will. The truth is, you can’t work forever. Eventually, Father Time will catch up with you.
Everyone should be preparing for retirement. If you haven’t started saving for retirement yet, then you should definitely read 5 Retirement Plan Options to Build Wealth.
Perhaps you believe retirement is simply not an option. For example, you are approaching 70 and only have $20,000 saved, or less.
Well, if this is our situation, maybe retiring in the United States is not the best option for you. No need to worry. There are many countries where your social security check will afford you a respectful standard of living.
But before you book a trip with Panama Relocation Tours, you first need to understand your Rich Ratio.
Understanding the Rich Ratio
The Rich Ratio is straightforward to understand and compute. You don’t need to understand algebra or perform any complex math.
All you need is a piece of paper, a pencil, and a pocket calculator. These are the only physical things you will need.
You will also need to know how much money you will have available for retirement. Add up what you can reasonably expect to earn from all your income sources, such as 401k savings, social security, pension income, rental income, etc., to calculate what your monthly income will be.
Then, add up all your monthly expenses. Be sure to include everything that it takes to live. You don’t want to low-ball this figure. Be conservative.
Divide your monthly income by your total monthly expenses.
Congratulations, you just calculated the Rich Ratio.
What the Rich Ratio tells you
Hopefully, the figure you calculated was greater than 1. A figure greater than 1 means that your monthly income is greater than your monthly expenses.
If your Rich Ratio is less than 1, this means that your monthly expenses are more than your monthly income.
I certainly hope your Rich Ratio is greater than 1. If it’s not, you have to find a way to reduce your expenses or increase your income.
I suggest you try to figure out a way to earn more money. Life is short. While many people are embracing the minimalist lifestyle, I don’t believe in eliminating things that add happiness to life.
There are lots of side hustles you can do to make more money while adding value to the world. There are many jobs that allow you to work from home.
The economy does not work well when everyone reduces spending. It’s this behavior that leads to a recession.
How much money do you need for retirement?
How much money you need for retirement is not based on your net worth. Your net worth is the sum of all your assets minus the sum of your liabilities.
The amount of money you will need for retirement is a matter of knowing the total amount of money you can expect to earn and spend each month.
Your lifestyle during retirement is not about your net worth; it’s about cash flow.
If your monthly cash flow exceeds your monthly expenses, you’re good. It’s that simple.
Don’t believe financial advisors that say you must have savings 20 times your annual salary to retire. While that is a worthy goal to reach, that’s not a rule of thumb.
How much you need for retirement is a function of your monthly income sources are and your monthly expenses.
The next time someone asks how much money does a person need to retire, ask them to calculate their Rich Ratio.