When it comes to building your retirement nest egg, a common rule of thumb is to save 25 times your annual expenses and then spend no more than 4% of your savings every year in retirement. The thought is, if you retire at or near normal retirement age, this strategy should allow your retirement savings to carry you through retirement. Sounds simple, right?
Not so fast! Inflation can eat away at your retirement budget and leave you underfunded if you don’t factor inflation into your budget.
Let’s say you are 25 years old, and want to retire on a $40,000 per year withdraw in retirement at age 60. According to this rule of thumb, you will need $1 million dollars to withdraw $40,000 per year.
There’s one problem: are you prepared to live on what $40,000 will buy you in 2053, or did you actually want to live off of what $40,000 will buy you today? With some additional legwork, you can adjust your savings target for inflation and better prepare yourself for financial independence.