Ask the readers – How do you come up with that magical retirement number?

Ask the readers – How do you come up with that magical retirement number?

One thing I’ve taken a little slack for is right now my only public goal is that I want to have $100,000 in principal deposited by the time I reach age 30. This is a good goal and has been pretty popular with many of my readers, however as a couple of you have pointed out – it’s a short term goal and really says nothing about how, when, and how early I can retire.

I’ve been meaning to come up with a long range retirement goal, but honestly the task is a little daunting and I’m not sure the best way to go about doing it. Now I’ve projected my retirement savings out 30-40 years in the future with expected investment returns, inflation, and withdrawal rates in Excel, but I don’t trust myself and even then how do you really know when you hit that magic number? In theory it’s pretty simple, just find a number that you can safely withdraw your required retirement income (inflation accounted for) without running out of money before you die.

So I’ve started down this journey and have used some online calculators, but to be honest I’ve gotten a wide range of results and many of them don’t even fathom you retiring before age 60. This is a huge variable that can drastically affect your retirement requirements. The earlier you retire the longer you have to live off your retirement savings and the less time you have to let the magic of compounding work in your favor.

I really kinda want to retire early, sort of. By this I mean when I get into my 40s (hopefully earlier 40s, although from my initial projects maybe mid-late 40s) I want to be financially secure so that I can do whatever I want. This won’t mean sitting on my butt all day watching Oprah, I’ve actually got grand visions of possibly a career change – maybe teaching high school and coaching sports and having the entire summer off with my wife (who is a teacher) and our kids. We could travel in the summer and I really think I would enjoy giving back by being a teacher and a coach. I may want to start my own business, or volunteer more heavily in a service organization, whatever master plan I come up with I don’t want to have to worry about sacrificing my retirement or my families well-being just because Dad decided to give up his “real job”.

So I’m on a quest to find the magical number that will allow me to sort of put retirement savings on cruise control and start concentrating more on areas of my life that I might enjoy more than working in an office everyday. So do you know your retirement number? If so how did you figure out what it was, what tools did you use, what factors did you take into account?

I’m really curious to see which retirement projection tools I haven’t run across yet and what it really takes to retire early.

  • I do my own spread sheets so I can do detailed budgets and test sensitivity to a number of variables. I am currently intending to retire at 50. Given the length of my retirement period and that my wife should outlive me my at least a decade, I have assumed that my savings will have to last for 50 years. This makes the number very sensitive to assumptions about rates of return, inflation and draw down. 0.5% variance in any one of those three variable over 50 years can wreck a retirement plan. The cumulative effect of all three variables working against me could see us eating catfood in our 90s. As a result, I concluded that it was unsafe to allow any draw down for such a long retirement period.

    Of course, if I keep working for a few extra years, even in a part time job, that makes a huge difference to the number as well. However, I have a number of possible plans for when I quit my current job and only some of them involve working.

  • I don’t think you should be taking slack for not picking a number. I picked a number, but it’s almost entirely of a hat. We’ve got so far to go that a billion factors could change course. It’s like trying to predict when Dow 20,000 will happen. Some might say 5 years while others would 10 and still more might take 20 or more.

    When you can be off by 100% like that, I’m not really sure the value in picking a number. I like the series short term goals where you can at least make a reasonable estimate.

  • About 3 years ago, I decided to go with a goal of $3.5 MM. I had nothing really to base it on, but thought it was a good place to start. But, I’ve recently decided to put less faith in that being a good goal. For one thing, it is hard to even guess what the buying power of that number will really be. If we have a few big inflationary years, $3.5 mm could end up being what $500k is now…not much. It could, on the other hand, be a very substantial retirement fund. More recently, I’ve been going on the ‘magic number’ of getting enough cash to be able to attain an after tax income of about $2000 a week.

    Now that I think about it, the $2000 a week is not really a financial goal, but a lifestyle goal. That’s what it really comes down to. If you want a magic number as a goal, that’s fine. But what you really want to answer is what lifestyle do I want to be able to afford.

    Here is a good example of that: My goals are to retire at 55 (tentatively) and have a lifestyle that would cost about $2000 a week. But, if I’ll 55 and am only 75% of the way there, I my very well make the call that the part of my lifestyle I am least willing to sacrifice is not working (at least not working full time). People don’t say it this way, but this is probably the reason most people retire earlier than they planned. It’s not that they hit their financial target early, its that they want to stop working and relax.

    That being said; If you have a PF blog like we do (sure, mine’s in its infant stage), its not very elegant to have a posted goal of “retire at 55 and be able to play golf”.

    So, to directly answer your question: $2000 a week. (but that’s certainly not the whole picture).

  • MFJ

    @Broke – I really like your weekly income goal, although like you point out inflation can wreak havoc with the most thought out retirement plans. $2000 a week might be nothing in 20 years

    @Lazy – Yeah I have a completely unscientific number that I think I would like to have and that is $10 Million, however I know to reach that I either got to have a substantial increase in income, invest like Warren Buffett, or not retire until I’m old an nearly dead (by my calculations age 65)

  • Mike

    I think the path to achieve retirement is a process, not a number. The hard part might be knowing when you’ve arrived.

  • MFJ – To clarify a little, I meant $2000 a week in 2007 dollars. So a substantial ammount, regardless of what inflation does. The way I track my progress to that is by a calculation I use on my current savings. Roughly, I take the after tax equivalent of my savings to date and project out to 2035 using 2.5% inflation and 7.5% return. Then I take that number * 5% (7.5-2.5) for annual salary and divide by 52 for weekly salary. That results in a weekly after tax salary in 2007 dollars. The nice thing about doing it this way is that I can more linearly track my progress. i.e. when I am 50% done, the number will be $1000. Right now, it is just a few hundred. The other nice thing about this is that it tells me where I am going to be at retirement (roughly) if at any point I stopped saving all together (like if I took on a less stressful career).

  • Did any of you catch the article at marketwatch about saving too much for retirement?

    Click here

    My plan is to save as much as I can with maximum Roth IRA contribution, a good chunk in 403(b) and then increasing contribution in a non-retirement account.

    This way my issue, should I be successful and not die young, my issue will be Mike’s… deciding when. And by retire, I also mean switch tracks. I do not dislike my job now, but I would like to not work full time, sooner than my 50s.

  • Omo

    I retired last month at age 53. I would have preferred to work another five to seven years, and I would have had considerably more in financial assets.

    But the newspaper I work for was being sold to God-knows-who, and buyouts were offered to senior staffers. The offer included subsidized health insurance until age 65.

    I crunched the numbers and decided I could survive on my assets, without working if I didn’t want to. It was a gut-wrenching decision, and I won’t be living a lavish lifestyle. But the alternative was to maybe be stuck at my job for another 12 years because I couldn’t get affordable insurance.

    The worst-case scenario: The new owner fires me and I end up with no buyout and COBRA.

    Here’s what I recommend: Save as much as you can and get your house paid off. I’m sure there are lots of people, both white- and blue-collar, being sideswiped like this by retirement these days.

  • MFJ

    @Wylie

    Yeah saw the article and have questioned it myself a couple of times….about having too much saved up for retirement. Like you I’ve thought about cutting off retirement at a certain point and putting into a taxable account. I guess the Roth IRA and Roth 401k (if you rollover into Roth IRA) do give you access the money penalty free (you can withdraw what you put in penalty free)

    @Omo – Is there a condition on the buyout that says you can’t get a different job somewhere else. I would think if you had the health insurance wrapped up you could really find a job that you would enjoy and would supplement your income. Independent contractor/freelancer comes to mind.

  • Omo

    Yes, I may want to do something to make money again at some point. I am free to do that. I did some free-lance writing after grad school and before landing the newspaper job.

    Right now, I am enjoying the relative freedom from stress. I had a very stressful job for 29 years with daily deadlines.

    I read that Marketwatch story on saving too much for retirement. I love Marketwatch, but I think that article was basically crap. I hope it doesn’t make people more complacent than they are.

    Roth IRAs are great, but most of my money is in tradition IRAs and my 401k. If I don’t get a job soon, I plan to begin taking substantially equal periodic payments from my IRAs next year under IRS rule 72(t), which allows penalty-free –but not tax-free–withdrawals based on life expectancy. I intend to spend no more than 4 percent per year of my total financial assets.

    If I had been able to wait until age 55 to retire, I could have taken unlimited withdrawals from my 401k without penalty, but I didn’t have that option.

    I have been reading this blog for only a couple weeks, and I can’t remember how I found it, but it’s fun.

    It’s amazing how quickly your life can change after being the same for so long. If you had told me five months ago that I would be retired now, I would have been stunned.

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