The 4% Rule

I am well into my 50s now and one of the things I am keenly aware of is retirement. I have been reading about how much money you need to retire in order to maintain your current standard of living. I have been reading about how much money you need to "not run out" of money during your retirement. Here is what I have come to realize...I will never be able to retire.

I live basically paycheck to paycheck. We have some buffer in savings, we have a retirement account, and I have an investment account. But there is a rule of 4% in order to maintain your lifestyle after you retire. Here is how it works:

• Take your current salary ($156,000) and that is what needs to equal the 4% you take out of retirement accounts each year. For you math wizards, this is easy...multiply by 25 ($3,900,000) and that is the amount you need to have in something like a retirement account. 
• Only draw what you make if possible. On average, an investment account will accumulate 4% per year. But what about all that other money I saved?
• You are going to chisel away at your retirement still. Cost of living increases between 2-3 percent each year. Medical expenses increase each year as you need that gall bladder removed or that new prescription.
• The average life expectancy has increased each year to now 78.8 which by the time you reach it should be around 88-90. So if you retired at 65 and just took the 25 years of money at 0%, you'd run out of money at 90. Hopefully, you are not average and become a centenarian.

So essentially, you need to be a multi-millionaire to retire.

But wait...what about my Social Security benefit? Right... If you wait until you can retire with FULL benefits at 67 years of age, you will receive a maximum of $3,011 per month. Retire at 65 like you planned? $2,857 per month. This is not close to your current salary, but it can help. It will help balance out that cost of living increase mentioned earlier.

So here is a word of advice... invest for retirement early. Save a little each paycheck into a retirement account and let the money build. Waiting until you are in your 40s or 50s is too late.