Your Retirement Number
Figuring out your retirement number is more of an art project than a math equation. There’s lots of advice and viewpoints. The simplest method is to take what your annual spending is and multiply by 25.
Why multiply by 25? Great question. It’s all based on the Trinity studies, which came to the conclusion that over a 30 year retirement you could take out 4% of your assets on a yearly basis (your withdrawal rate) and have a very high probability of not running out of money, assuming your invested in equities and bonds in an intelligent allocation. It’s not perfect and with longer lifespans, or if you’re hoping to retire early you may want to adjust your withdrawal rate down, but it’s a good starting place.
So if you would like $40,000 per year in retirement then you would need $1 million to retire ($40,000 x 25). Holy bananas. This is where people freak out, if you didn’t freak out when you found out you had less invested at your age than the average person back in step 1.
But don’t worry fool.com found that the average household brought in $24,600 in benefits (pension, social security, etc.) so they would only actually need to pay for the other $15,400 per year, which would be $385,000 to retire ($15,400 x 25). Thank you government!
But how do you know if you need $30,000 or $40,000 or $60,000? The typical advice is to try and target 70-85% of your current income for your retirement income. That ties closely with an Aon study which showed what actual people spent in retirement. So if you’re current salary is $60,000 per year aim for an annual retirement income of $42,000 to $51,000. If your house is paid off, you have no debt and live simply, you can aim for the lower end.
What does the average retiree spend?
Average expenditures, age 65-74 ($48,885)