What's Your Number?
A simple question but not a simple answer when it comes to retirement. There are many articles, tools, and perspectives on this topic but many of us struggle with understanding their number. A recent Transamerica Center for Retirement Studies poll indicated that only 16% of workers have a retirement strategy in writing which explains why so many Americans are not saving enough for retirement. This post will give you some tools for calculating Your Number and hopefully start a successful journey from work to retirement.
When I announced my plan to retire at work, it surprised some of my co-workers. They assumed I would work another three to five years based on my age and their target retirement age. In my organization, succession planning is a hot topic these days but its ‘off limits’ for your boss to ask you when you plan to retire. Yes, we live in a complicated / politically correct world these days.
A few days after telling my boss that I planned to retire, the leader of my organization asked me out to lunch. I have a great relationship with this person, so a lunch meeting was very natural. Over lunch, we had a good conversation about my upcoming retirement. We covered all the usual questions around retirement like: how long have you been thinking about this, where will you live, what will you do, etc. During our conversation, one question he asked me was - What’s Your Number?
At first, this seemed a little odd and caught me off guard. But it is a very relevant and fundamental question as you plan for retirement and one that I spent considerable time answering. It was refreshing to be able to answer the question, because knowing Your Number is very critical for retirement planning.
Through our life, we plan and save for many things, homes, cars, college education, etc. But, I have found retirement planning and knowing Your Number is very complicated and intimidating.
Below are the methods I used for calculating My Number. Using multiple calculations gave me the confidence I was moving in the right direction. Plus, I’m a planner at heart. Finally, I worked with a financial professional to build a plan for my wife and me. I hope these tools will help you understand Your Number and lead to a successful retirement strategy. Let’s join the 16% of workers who have a retirement strategy in writing.
1. The 80% Rule
This rule is a relatively straightforward calculation. Take your current gross income and multiply it by 80%. The result will give you an approximate amount of income you will need in retirement every year. The basis behind this calculation is that on average retirees spend about 20% less in retirement versus working. They no longer have to commute to work, buy expensive work attire, save for retirement, pay for lunches, etc. Plus, most retirees that are living on a fixed income are more frugal since they have less disposable income.
Now, let's turn this number into a total amount or nest egg. Take your retirement income from above and multiply it by 25. This number assumes you will be withdrawing ~4% of your nest egg each year and retiring at a normal retirement age (65 - 67 years old). Here is an example. If John and Carol currently make 100k per year, their retirement income should be 80k per year with a total nest egg of $2M dollars. Yes, that’s a lot of money but remember you will need retirement income for 25 - 30 years depending on when you retire and how long you live.
* 25 = $2,000,000
Some other considerations: First, this method does not take social security or other retirement income you may have into account. To fully understand your retirement nest egg, you should subtract these from your annual income number above before you multiply by 25. Also, don’t forget occasionally you may have some significant expenses like a new car, roof for the house, medical expenses, etc. So, plan for a little extra savings each year in your annual retirement income number.
2. The Bottoms-Up Method
The bottoms-up method involves building a detailed budget to estimate your annual retirement income versus the 80% rule. I recommend this method for business executives who may receive other compensation while working like bonuses, stock options, etc. When you retire, this compensation goes away so you should calculate your retirement income based on your actual needs via a budget. Use this method to calculate your annual retirement income, then multiply by 25.
I’ll share in a future post the decisions my wife and I made to adapt to the 80% rule and how we used the bottoms-up method to understand of retirement income needs.
3. Use a Retirement Calculator
There are dozens of calculators that are available. I recommend visiting some of the large mutual fund sites like American Funds, Fidelity or Vanguard and use their tools to approximate your retirement needs. Note: I’ll dedicate a future post on reviewing some of the more popular retirement calculators.
4. Seek Professional Advice
Setting and understanding Your Number is one of the most important decisions you will make for retirement. To get started, you can use the following methods above, but I encourage everyone to seek professional advice. A financial advisor or certified financial planner can spend time with you to understand your current income, savings, retirement goals, and develop a detailed plan for retirement. They have excellent software to model different scenarios and build a financial plan for you. They will charge a fee for their time, but it is well worth it.
I hope this post provides some useful tips for everyone planning for their retirement. The best advice I can give you is to work with a financial professional to understand Your Number, then develop a savings plan that will achieve that goal.
I would love to hear from you, help you, and answer your questions.
Good luck and let’s #RetireHappy!