You probably have run into a few retirement books over the years. One of the more interesting of them was one entitled The Number.
That really puts a fine point on things, doesn’t it? How much do you need to retire, exactly? What’s your “number” for retirement?
Often, we assume a large round figure and let it go at that. Like $1 million.
But it’s more than a little unrealistic to pick a number from the air without knowing two important things: How do we get there, and do we even need that much money anyway?
Last things first. You should not target a number you need to retire but instead get a real sense of how much cash you need to live well and care for yourself. That’s what retirement is, after all — not having a job anymore.
Go through your monthly spending now. Look at your bills, your bank account, any credit card spending and come up with that number first. Work with a year’s worth, so you don’t miss any one-off costs like insurance bills or vacationing.
Now, subtract the costs that will go away. Probably, that will be your mortgage. You’ll replace cars less often, so halve your automobile spending.
Add back some money for healthcare costs, since those will creep up for sure. And make sure you assume a certain amount of “splurge spending” on travel or new hobbies.
Now you have your really important number, your cost of living in retirement. The only issue is how to pay for it.
Chances are, you haven’t really run your own Social Security estimates. Do it now. It’s free at the Social Security Administration.
Let’s say you came up with a figure like $25,000 a year in Social Security income. You know your post-work life is going to cost you about $50,000 to pull off.
That means you need $25,000 in regular income. Assuming a 4% withdrawal rate, you now know you need $625,000 to retire. That’s a lot less than $1 million.
If you’ve been saving into a 401(k) plan for a few decades, even modestly, you might be closing in on your retirement number early! But let’s assume you are short.
No need to panic. Just amp up your savings rate and aim to work a few years more. The important thing to remember is that money compounds. If you can take Social Security and work part-time, your private savings plan has time to grow.
A retirement plan with $300,000 in it could double in value in 10 years if properly invested, and faster if you make larger contributions along the way. Making your retirement number appear is just willpower and planning.