Calculations for a Comfortable Retirement
Generally, owners of small businesses decide to finance their through the sale of their company. While this may be a good plan, business owners often do not consider the amount of money that they will receive during the sale.
Develop a retirement budget in today’s dollars
While developing your retirement budget, you could start by considering your current expenses and forecasting whether these would still exist when you would be retiring. For instance, if you have children, they would probably have grown into adulthood and become self-sufficient. Other financial aspects such as a mortgage would have been paid off. Your retirement income would also need to cater for activities that you might want to indulge in once you would be free from professional obligations.
Estimate any income you will have in retirement
In some cases, you would be eligible for a person scheme. Even though social security might be around, you might want to disregard this income in your calculations. Moreover, some people do not plan to go on full retirement. They would therefore still be receiving an income and this would reduce the amount needed from the retirement scheme.
Consider the effect of inflation
If you are planning to retire in 15 years, it’s essential to factor in the effects of inflation on your savings. Inflation reduces the purchasing power of money over time, meaning that the amount you need in the future will be higher than today’s value.
Let’s assume an average annual inflation rate of 2.5% over the next 15 years. If you estimate that you need $3.3 million in today’s dollars to retire comfortably, you must adjust that figure to account for inflation.
In 15 years, you would need approximately $4.72 million to have the same purchasing power as $3.3 million today. This means that when setting your retirement savings goal, you should aim for at least $4.72 million to maintain your expected lifestyle.