By: Dividend Sensei
Now the good news is that the average social security beneficiary gets $17,000 per year, or enough to cover about 37% of one’s total costs. The system was designed to provide for 40% of a recipient’s expenses so the system is working as designed. But that means that you will likely need $29,000 per person annually from personal savings.
Which brings us to another important factor, which is your time horizon. There is a big difference between having 20+ years to save for a goal such as retirement, and having five years or less. That’s because of the 4% rule, pioneered by CPA William Bengen in 1994. Bengen’s study looked at market history going back to 1926 and found that even when accounting for the worst market crashes, and inflation, a 60%/40% portfolio of stocks and bonds would last at least 33 years if you limited your withdrawls to 4% of the portfolio and adjusted annually for inflation.
This means that for the $29,000 per year the average retiree will need by retirement you need a $725,000 nestegg. Assuming that prior to retirement you invested 100% in a low cost S&P 500 ETF (like VOO), and it achieved its average of 7.0% inflation adjusted total returns since 1871, here’s how much you’d have to save depending on your time horizon.
|Years To Retirement||Monthly Savings Rate (To Achieve $725,000 Retirement Portfolio)|
(Sources: MoneyChimp, Dave Ramsey)