Most people think of how much money they would need to last a certain number of years and total it up. The problem is, none of us know exactly how long we will live. Rather than decide how much cash we need to live off of, we should instead set aside a nest egg and live off the interest.

That said, if you retire at 65 and live until you are 85, you’ll learn that five thousand dollars (or however much you draw a month) loses a lot of its value over twenty years. You need to account for the cost of living, which increases an average of 4% each year. If you’ve invested in mutual funds that average the same of the stock market, 12% each year (remember, that’s an average, so some years will draw more, some less) and you leave in 4%, then you draw out 8% of your increase.

To determine how much you need to be setting into retirement, you need to figure out what annual income you would live off, on average. Then you need to multiply that number times 0.08 (8%) to determine what sort of nest egg you will need. For instance, if you have a million dollars set aside (an easily attainable goal if you start saving in your twenties and continue faithfully for the next forty years) and you lived off of 8%, you would draw an average of $80,000 each year. However, by leaving 4% in the nest egg, you will allow it to grow, increasing your “salary” each year by about 4%. Thus the $80,000 you start with will increase each year, allowing you to maintain the same standard of living.

This method of retirement planning allows you to not only survive the financial struggles of old age, it also gives you a significant inheritance to leave your children or your family at the time of your death.

While a million dollars seems like a lot of money, you have to remember that if you start investing while young and continue faithfully – and the key word here is faithfully and regularly – for forty years, this is an easily attainable goal. Even if you start a little older, if you invest wisely, this is a possibility, especially if you don’t need an income of $80,000.

Nola Redd is an author on http://www.Writing.Com/ which is a site for Poetry. She maintains a blog for LDS Families at Families.com.