Pocket rules are important for simplifying account understanding and problem solving. One of the problems that everyone faces is figuring out how much financial wealth is needed to retire. I explain two rules of thumb to resolve this issue.
One of the first steps in building a financial plan is setting goals. Among the objectives, there are the short, medium and long term.
A common long-term goal for all is to have a comfortable retirement.
To define this objective of retiring in a peaceful way, it is necessary to establish four parameters: the moment of retirement, life expectancy, income during this period and the desired monthly income.
The account is not complex, but there are two rules that are excellent for those who are new to financial calculators.
The difference between them is the premise about a common desire among parents. Most parents want to leave some assets for their loved ones. To fulfill this desire, parents need to make a greater effort to give up consumption and build savings.
If you do not wish to leave any assets as a succession, you should use the rule of 250. In this case, your financial assets can be completely consumed during your retirement period. Therefore, your income during retirement is part made up of investment income and part of principal redemption.
In the rule of 300, the expectation is that your wealth is not consumed, but you live only on the income generated by it.
Therefore, the desire to leave an estate to the children requires an effort of saving about 20% more.
The account is very simple. Simply multiply your desired monthly income by your chosen rule.
For example, if you want to have an income equivalent to BRL 10,000 per month, your financial equity must be BRL 2.5 million (= 250 * BRL 10,000) in the 250 rule. In the 300 rule, your financial equity right before retiring should be R$ 3 million.
In both rules, a reasonably conservative assumption of yield is used for investments of 4% per month above inflation.
Now, you already know how to calculate in a simple way the net worth goal you must reach before retiring. So your next step is to build an investment plan that takes you from where you are today to your goal. What are you waiting for?
Michael viriato is an investment advisor and founding partner of Investor’s House
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