Finding your retirement number may be just as important as how you invest, use these tips to find your retirement goal
I see people chasing hot stock tips every day, reaching to ‘beat’ the market and a gain of some arbitrary percentage on their investments. This kind of blind investing strategy is a big reason why most retirees are woefully unprepared to meet their financial goals.
Investing without knowing your retirement number, the amount of assets you’ll need to cover expenses, is like going on a road trip with no destination. You may see some nice sites but you’ll never get anywhere.
Finding your retirement number is just as important has how you get there. While no one can know exactly how much they’ll need for retirement, there are a few good ways to get a close estimate.
How to Find your Retirement Number
The simplest way to find your retirement number is by multiplying your expenses by 25 times. For example, if your current expenses are $35,000 then you’ll need $875,000 to spend in retirement. The idea follows the rule of thumb that you can safely withdraw 4% of your portfolio each year in retirement. You might be able to get away with a multiple of 20 times, withdrawing 5% each year.
The expenses multiple might be a little too simple a way to find your retirement number. Your expenses will change over the years to retirement and will change significantly after retirement. It’s better to adjust your estimated expenses for your retirement lifestyle. Remove expenses from your current spending that you won’t have in retirement like saving for education and retirement. Then add in other expenses for any traveling or special expenses in retirement.
The alternative method to find your retirement number is to take a percentage of your current income and then multiply it by twenty-five. The idea is that you won’t need all your current income to maintain your current standard of living. The general rule-of-thumb is to take 75% to 85% of your income for your retirement number calculation.
The income percentage method is another simple way to find your number but not necessarily any more accurate than the expenses method. Your retirement spending is going change even after retirement. A 2012 report by the Employee Benefit Research Institute found that spending dropped fell 19% over the ten years to age 75 and fell by half by the time the person reached 95 years old.
Finding a more accurate retirement number means making a lot of assumptions about your annual return, savings rate, future expenses and even how long you’ll live. The good news is that you may not need to be so precise.
Imagine trying to plan a vacation you want to take in 20 years. If that sounds impossibly difficult to plan, imagine trying to plan your entire life that far into the future. You’re probably fine getting within a few hundred thousand around your retirement number, especially if you’re 20 years or more out from retirement. Revisit your calculation every five to ten years to fine-tune your number and retire happy.
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