How to calculate how much you need to retire

What you need to do is:

1) First estimate your expected annual expenditure in retirement.

2) Then you you must double this amount to make up for inflation. (You will have to put half your net after tax income back into investments to beat the inflation which erodes them). This is the minimum amount of after tax income your investments must generate.

3) Then you must divide this figure by (1 - your tax rate). For example, if your tax rate is 35%, you will divide by 1 - 0.35 = 0.65. This is the amount of annual pretax income you must generate.

4) Now you must divide this figure by your expected investment return. For example, if you expect your investment return to be 10%, you will divide by 0.1. If you expect your annual invesment return to be 8%, you will divide 0.08. This is the amount of capital you need to retire on.

The whole formula looks like this:

d = (a x 2) / (1 - b) ) / c

where

a -- amount of annual expenditure you expect in retirement
b -- your tax rate
c -- annual return on investment you expect to generate
d -- amount of capital required

Solve for d.

As you can see, all three of the four crucial variables in this calculation are controlled by the government: investment returns (through economic and fiscal policies, such as the setting of interest rates), inflation rate (through monetary policies), and tax rate (through fiscal policies). Since governments live off our income, they are vitally interested in making us work as hard and as long as possible. They are not interested in making early retirement easy for us and you must expect such unfriendly policies to continue.

Good luck.