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Retirement Numbers

September 24th, 2008 at 03:38 pm

Every financial site has there 2 cents on how to determine a retirement number. Some are complex formulas that use monet carlo simulations. They simulate various market conditions and inflation scenarios about a 1,000 times to spit out numbers like there is an 87% chance that you will reach 73% of your goal.

So what is a lay person to do?

Personally, I like simple and easy things. So the first thing is to determine the amount of income you need in retirement. Some sites say 80%, some others say less. I use 100% of my income.

Why? First, it is easy to compute (income * 100% = income). Secondly, I know I can live off this income (I am doing it know). Third, I am actually living below it so I have some cushion. Forth, even if I retired, my work related expenses would decrease but my leisure expenses would increase so it would probably be a wash.

Now take your income and multiply by 25. Why 25? Because 25 times your salary would allow you to withdraw your salary every year and allow for your savings to grow and keep up with inflation. So, if you could get an 8% return, you could take out 4% and increase your yearly withdrawal by 4% to keep pace with inflation.

But that number is huge!!! 25 times let's say 100k = 2.5 million. That is a lot of money. This number can also be adjusted down. If you have a pension, annuity, income producing real estate, or social security, you could reduce that number significantly.

Let's say I am going to get 1,500 a month for SS or 18,000 a year. I have a three family that's paid of when I retire and I can get 2,200 a month from that after expenses or 26,400 a year. Well, that's 44,400 a year in income. So theoretically, I would only need to generate 55,600 a year and my number would need to be 1.39 million instead of 2.5 million.

Now, I am figuring this all off of invested assets. I am not including my house, automobiles, furniture, etc. I am not including the house because I don't know where I will live in retirement. It may cost more or less. But I could live in my house for most of retirement.

I didn't include the rest because the resale value is negligible on a nest egg of 1.39 million.

What I also like is that this approach tends to be pretty conservative. In other words, I am retiring on what I am currently making adjusted for inflation without touching my 1.39 million nest egg. This allows me to have a cushion for the unforeseen, take care of nursing home expenses, leave a little something to the people I love, and most importantly not be a financial burden.

2 Responses to “Retirement Numbers”

  1. fern Says:

    I like the simplicity of your formula.

    They say that a 65-year-old retiring today would need to set aside $200,000 simply for out-of-pocket healthcare expenses that Medicare won't cover. And that's not factoring in if you have any chronic diseases or require ongoing meds. It also doesn't factor in long-term care costs.

    So the more conservative, IMO, the better. There are so many variables...not just heatlhcare costs, but taxes, for another thing. No one seems interested in talking about the federal budget deficit these days, but what with bailouts for AIG, Fannie and Freddie and now the entire sub-prime banking industry, our deficit will climb considerably. That means, most assuredly, that taxes will go up.

    In the past, i've relied on a 80% of my current living expensees for the retirement calculation, since once i'm retired, my mortgage will be paid off and i also won't be doing the extra $425 monthly prepayments twoard it either. Also, i will no longer be contributing to my 401k and IRA, having (hopefully) finally amassed enough to start drawing from. I think some people forget about those expenses going away.

    When my mortgage ($775), mortgage prepayments ($425) and retirement savings ($425) go bye-bye, i figure i'll have $1625 fewer monthly expenses, and while i do plan on traveling, i don't think i'll spend $19,500 on travel annually.

  2. scfr Says:

    What do you use for "income"? Gross earned income? Net earned income? AGI? MAGI?

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