We all dream of that magic day we can retire and truly become masters of our own time. A dream without a plan, though, runs an immense risk of becoming a living nightmare.

When you dial it back to its essence, retirement planning is about answering just two questions:

  • How much do you need?
  • When can you come up with that much?

Finding your answers
Probably the easier of the two questions to answer is how much money you'll need to retire. History suggests that if you plan to live about 30 years in retirement, you can follow the 4% plan. Under that plan, you can spend 4% of the initial value of your well-diversified investments the first year of your retirement, and adjust that amount for inflation every year after that. With that number in mind, the answer becomes obvious. You need to save around 25 times your expected first year's spending, adjusted for any pensions, Social Security, or retiree health benefits you may receive.

So if you'll need your savings to provide $40,000 per year in retirement income, you could get away with retiring on $1,000,000 -- if you had it today.

Unfortunately, the goalposts keep moving. Thanks to inflation, you need to save all that much more. For example, if you plan to retire in 20 years, you'll need $87,600 then to pay for what $40,000 buys now, assuming 4% annual inflation.

The numbers just get higher and higher the further out you go. That's why the more you invest, and the sooner you start investing it, the easier it'll be to turn your dream into reality and actually retire. Simply put, the more you put the power of compounding on your side, the better your chances of taming that inflation monster.

If you can earn about 10% annually, here's how much you have to invest every month to reach that inflation-adjusted $40,000 target:


2% Inflation

3% Inflation

4% Inflation

5% Inflation































And the answer is ...
To figure out when you can retire on $40,000 a year, simply pick your estimate of long-term inflation and start scrolling down the table. Once you reach a number that you can sock away each month (including help from Uncle Sam and your boss, of course), the "years" cells will tell you how far from now you can retire.

Even if your inflation-adjusted retirement income goal is different from the $40,000 calculated here, you can still find your answer by scaling your required monthly contributions accordingly. For instance, if you want an $80,000 income, double them. If you'd be satisfied on $20,000 per year, cut them in half. Remember, this is just the income you'd derive from savings, so perhaps that $20,000, when combined with Social Security and perhaps a pension, will be enough.

While the 10% returns you need to couple with those significant savings goals may seem aggressive, they are in line with the market's long-run historical returns. The easiest way to have a legitimate shot of reaching that goal is to put your savings on autopilot. If you automatically invested in an S&P 500 index fund every month, you'd be buying a stake in these well-known businesses that make up a huge chunk of the market:


Weight in
S&P 500 Index

ExxonMobil (NYSE:XOM)


Cisco Systems (NASDAQ:CSCO)


JPMorgan Chase (NYSE:JPM)


Verizon (NYSE:VZ)


United Technologies (NYSE:UTX)


Boeing (NYSE:BA)


Monsanto (NYSE:MON)


It's up to you
Your time. The lifestyle you desire. The money you can routinely set aside for your future. They all work together to help determine when and how you can retire.

If you're ready to design and live by the plan that will take you from here to retired, then join us at Motley Fool Rule Your Retirement today. To help jump-start your plan, take the next 30 days to look around, free.

Fool contributor Chuck Saletta is actively investing toward his own retirement. At the time of publication, however, he did not own shares of any company mentioned in this article. JPMorgan is an Income Investor recommendation. The Fool has a disclosure policy.