After a few years of good returns on the stock-market you might think your finances are well set-up for a comfortable retirement one day (soon?). But you may need to save more than you think.
A common thing people overlook when forecasting their nest-egg requirement is to cater for inflation. Inflation can be pernicious over long periods.
The key to properly adjusting for inflation is to appreciate that it influences both the amount of nominal income you’ll require at retirement and also the lump sum you’ll require to produce this income. Most people don’t cater for one or both these factors.
By way of an example, if Cathy requires $60k of real income each year in 30 years when she retires, she requires $109k nominal income assuming 2% inflation for 30 years. And then considering the lump sum she needs to produce this income, assuming 8% returns and that she doesn’t wish to draw on her principle, she would need $1.4m without inflation but $1.8m assuming 2% inflation.
All up Cathy requires a nest-egg more than twice as large as what she would have estimated had inflation been forgotten.
Interested in how you might need to retire? Check out our retirement worksheet or you can play with the numbers below yourself.