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Calculating Your Retirement Number Goal Based on Your Retirement Plan

What’s your retirement number? Everyone has different needs, desires, and goals for retirement– and guest contributor Andy Shuler tries to unpack each of those so you can calculate your own retirement number.

RETIREMENT!  Retirement, from the viewpoint of myself and a vast majority of my acquaintances, is something that a lot of people aren’t proactively planning for.  You can pretty much narrow it down to one of three different situations:

  1. You’re proactively planning and have a retirement number
    • This might mean you’re actively contributing to a 401K, IRA, high-yield savings account, etc.
  2. You’re not planning for retirement
    • You’re living paycheck to paycheck, spending all of your extra money, or just letting it sit in a bank account and earn the ever gracious, .01% that my old savings account gave me.  I don’t want to sound ungrateful, but if I put $100,000 in that account when I was 25 years old, I would’ve made $400.80 in interest by age 65…. talk about getting rich, quick!  (sarcasm).
  3. You’re late planning for retirement
    • You’re starting to save for your retirement number, but you might be late in your career.  To quote the generational leader that he is, Lil “Weezy” Wayne, he says “better late than never, but never late is better.”  And yes, I know he’s not referring to retirement investing when he says this…but it STILL FITS!

If you’re not planning for retirement, start.  If you’re late planning for retirement, amp up your saving.  If you are proactively planning for retirement, good, but are you sure you’re saving enough? 

In the end, that’s really the question. 

A good rule of thumb is to try to have a method to replace 70% of your pre-tax income with retirement funded income. 

For instance, if your base salary when you retire is $100,000, you should aim to have $70,000 funded to yourself, each year, of your retirement.  If you know that your house will be paid off, you can adjust that down to 60%.  If you intend to buy another house, travel frequently, or increase spending, you should adjust that percentage up…considerably. 

Retirement Number Examples (3)

For the purposes of this article, I’m going to use the percentages of 60% (The Thrift Master), 70% (No Income, same bills) and 100% (Big Baller) to portray the various levels of money needed for a retiree.

Ok, so now that you’ve decided on the retirement lifestyle that you desire, the next step is to find out what total amount of money you will need to be able to financially achieve that value. 

Let me introduce to you the 4% rule. 

The 4% rule is a rule that allows you to conservatively back into the amount that you will need to retire and maintain that desired lifestyle. 

The rule itself is really pretty easy…all you need to do is take your Last Year of Salary and multiply it by the Assigned Retirement Percentage based off the Desired Retirement Lifestyle that you’ve picked to get the Yearly Retirement Cashflow Needed.  Then take that number and divide it by .04 to get the Total Retirement Money Needed (your retirement number).

I’ve outlined an example below:

retirement number example chart

As you can see in the last column, the amount of money needed is drastically impacted by your lifestyle, which is common sense. This number might seem very large, and it is, but it shows the importance of starting to save early. 

So now you’re probably thinking, “So Andy is saying if I save $2,500,000 by retirement, I can be a big baller?  I just let the money sit there and then BOOM! There shows up $100,000 each year in my bank account?”

Well, Mr. or Mrs. Reader, you’re actually somewhat correct.  Let me explain the concept of the 4% rule…

The 4% Rule for Retirement

The 4% rule was created as a way to help people plan for their retirement.  Essentially, the concept is that if you take out 4% of your savings each year, you will be able to survive more than 30 years, at the absolute worst case, on that money alone. 

William Bengen was very skeptical of this and ran multiple different scenarios, for people retiring each quarter between 1926 – 1986, and the shortest timeframe of anyone’s money lasting was just over 30 years. 

To reiterate, Bengen literally ran the worst possible case in a sixty-year period and the lowest amount of time that the money lasted was still over 30 years.  Wow.

With that being said, there are some assumptions that go into these scenarios and things that can make your money last longer. 

Investing in Dividend Stocks for Retirement

It’s encouraged, even more so when in retirement (but also now), to put a heavy emphasis on dividend stocks. 

Many stocks, such as the Dividend Aristocrats, perform extremely strong yields that can allow you the opportunity to draw on that 4% and maintain your balance even longer. 

I have been told before by other investors “why would I want a dividend?  I want my company to invest back into their business and keep growing”. 

Well…I have two comments to that. 

First and foremost, the closer you get to retirement, the more conservative you should be as an investor.  Dividends aren’t guaranteed by any means but investing in companies that are decent size (must be in S&P 500, meet minimum size and liquidity requirements) and have 25 or more years of a growing dividend, is pretty dang close to a sure thing. 

So, if you can invest in a company that you start off with essentially a guaranteed return, you’re already ahead of the curve. 

And 2nd, and please promise to just keep this a little secret between you and I, the average annual return from 1991 – 2018 is 1.4% better than the S&P 500 during that same timeframe.  Who knew.