Assume for a moment that you have one million dollars invested and you want to know if you have enough money to retire. Assuming your investment is earning exactly 5% per year, then that means you will be earning $50,000 in the first year. Assuming you are in the 30% tax bracket, you will be paying $15,000 in taxes from the $50,000 earned. This leaves you with only $35,000 left as income ($50,000 - $15,000). However, if inflation is at 3% and you want to keep your principal the same after inflation, then that means you will have to add $30,000 (3% of one million dollars) of the income back into the principal. That leaves only $5,000 a year as income ($35,000 - $30,000). Surely that is not enough money to retire.
To help you calculate how much money that you need to retire, you can use this free online calculator:
Of course, this calculation assumes that the principal remains constant with respect to inflation. If someone plans to be retired for a very long time, then this retirement calculator would be very useful.
by Phil for Humanity