Calculating Your Retirement Number
Just like counting calories to lose weight, you can’t hope to effectively achieve a retirement goal if you don’t know what it is. So many sources recommend this or that savings rate, but that can almost be a backward way to look at things. If you want to get to a destination, you’ve got to reverse engineer the goal! This article will show you how to calculate your retirement number so you can be crystal clear where to set your sights.
If you’re serious about living well and taking action to create a successful financial future, I’m talking to you.
This should really be a very customized conversation. It should include your income, your savings rate, your relevant health history, your assets, your expected income increases, and your family needs. Since I can’t do that in a blog article, my goal here is to give you enough information to formulate a rough plan.
Retirement should be planned for based on the number of years you have left to SAVE in order to build up your savings—and the smaller the number of years the more critical your actions now.
You’re the CEO of your Personal Financial Future Corporation and the mission of your entire organization is to build a portfolio that will provide enough income for you and your loved ones to live and then for you to leave the legacy you want to leave.
Some people might be able to retire with a million dollars saved, some don’t feel comfortable with $20M. What’s important is your goal, your trajectory, the consistency with which you save and your ability to make educated choices about trade-offs.
What are the keys to having a wealthy retirement?
- Make a plan—an actual plan—that is written down and has numbers and reality in it.
- Execute on the plan with the intention of meeting your goal.
- Review the plan at least annually, assess plan versus reality, make adjustments and return to #1. It’s not rocket science, but it requires the extraordinary human qualities of integrity, commitment, and intellectual honesty.
Here are some rules of thumb:
- You have longer to plan for than you probably think. Of course, there are exceptions to every rule and I don’t know your health or family history, but men should probably plan to live to 90 and women to 95 at least.
- General rule of thumb: For every $50,000 per year of today’s money you want to take in retirement, you’ll need to save $1,000,000. So, if you want $200,000 in today’s dollars in annual retirement income, you need to save $4,000,000.
- You can expect the prices to double approximately every 24 years, so if you have 24 years to save until retirement and you want income in retirement that feels like $200,000 today, you’ll need to save $8,000,000 (because to feel like $200K it will have to actually be $400k. (holy wow, right?)
- As far as investment returns go, always remember the Rule of 72. Take your annual rate of return and divide it by 72 to figure out how long it takes your portfolio to double. If you have low-cost, index-based globally diversified investments, that portfolio should produce just under 10% per year in returns for you, after fees. So, it should take about 7.2 years for a properly invested portfolio to double in size. This is true in the long-run, and yes, the last 12 years are not representative. But it’s still the best projection for the long run.
- Don’t throw the Social Security baby out with the bath water yet. It’s highly unlikely Congress will take it away altogether if you’ve paid into it, and that can mean millions of dollars of income over time. The Administration is no longer sending paper statements, so go here to their benefits calculator and include that income in your plans—meaning reduce your required savings by the appropriate amount to take it into account.
- Health care costs will likely continue to grow much faster than inflation. The health care costs item deserves not just a bullet point in this list but a public policy manifesto. I can’t do that, so let’s just say for thought exercise purposes—double, maybe triple your current monthly policy costs.
Now, armed with all of that information, here is a link to a decent retirement savings calculator on the Vanguard website. Input your current savings, income, and desired retirement income information, and at the end the calculator will show you any shortfall and tell you how much additional you need to save to make it up. And then let me know what questions you have!