A common question among many people who think about retiring at a normal age of 65 or retiring early is how much money do I need to accomplish that task? Can I get by with a million dollars? Two million? 100,000? What is my number?
It’s an important question. In a recent survey of retirees most people fear outliving their money. They worry they haven’t saved enough or wont have enough money to leave to their children or grandchildren. Because of that it may cause some people to work longer than they need too. There is the ONE MORE YEAR syndrome. If I can work just one more year than I will be financially set and I can finally retire.
But are those people who wait doing themselves more harm than good? I mean Time is our most precious commodity. By working longer you deprive yourself of being able to do with what you want on your own time. You are not the master of your ship and captain of your destiny. Consequently, there are all kind of commercials for some of the major financial brokers including Fidelity, Schwab, Vanguard, etc. All of which want to help you figure how much you may need to retire. Whether or not they can truly help you is a different ball game. But getting back to that original question: how much do you need to retire? Or in my case become financially independent?
Retirement Rules of Thumb: 4% rule
To that end, companies have come up with many different rules of thumb to use. The most common rule of thumb is the 4% withdrawal rule. 20 years ago, William Bengen, published a study in the Journal of Financial Planning where he argued that if retirees took out only 4% of their nest egg each year in retirement that they would not only be able to retire, but not outlive their money. In essence, the 4% rule translates into saving almost 25 times your earnings. So if you earn $50,000 and that is what you need to live then you need to save upwards of $1,250,000 in order to make your money survive and live the lifestyle that you have been living.
Some of you may be looking at that number and thinking there is NO way I can save that much. Are you crazy?
Retirement Rule of Thumb #2: 8x Your Final Salary
Other companies advise different benchmarks. For example, Fidelity argues that you only need to save 8 times your final salary in order for to retire and maintain your lifestyle. Also, Fidelity has specific benchmarks that they think you should try to achieve. For example, by 35 you should have saved 1X your salary, 3x your salary by 45, and 5x your salary by 55.
Retirement Rule of Thumb #3: 70-85% Replacement Income
Another benchmark to use is that you need to have enough in your retirement accounts to replace upwards of 85% of your current income per year. The problem with that number is that you have to figure out how much you spend, what kind of income you have, and then how much you will need to save to get that 85%. Is it 25X your income or is it 8X? Is it less or more?
Financial Calculators Galore
On top of these financial tips there are all kinds of different financial calculators that will tell you when/if you can retire. Some are more conservative than others. Some consider Social Security and potentially other streams of income. But there is definitely a calculator to suit your needs. But the problem is that this still doesn’t answer the basic question: how much do I NEED to retire? Or in my case become financially independent?
What is My Number?
Some of you are reading this right now and might be more confused than when you started. Because there are so many rules of thumbs, calculators, etc. that it can be difficult to wade through the minefields and figure these items out for yourselves. In fact, there are a plethora of articles out there who will take issue with each of these financial rules of thumb arguing that they are out of date and don’t take into account a changing world.
Well, the world is always changing and it always will. Volatility is not unusual and will continue. Unless humans figure out to say Kumbayah any time soon I don’t think that change and volatility will leave.
So where does that leave us? Well, it leaves me facing a couple of things. Here are things I consider when I believe I will be truly financial independent. Each situation is different that is why you need to think about what you truly want in life? What is a comfortable life for you? What might you do when you retire?
Jason’s Rule of Thumb #1 For ME (not you): I must be debt free. I cannot, nor will I declare myself financially independent until all of my debt is paid off. House, student loans, cars, etc. All of it needs to be gone before I feel even comfortable with the idea that I can declare my independence.
Jason’s Rule of Thumb #2 For ME (not you): I need to track my spending for at least two to three years and figure out how much money I am spending on normal things in life (food, taxes, gas, etc). To me it is not a good idea to say that I have saved 8 times my salary or 25 or 50 or whatever and not know how much I am spending.
Now I fully admit that I might spend a bit more or less depending on the year. I want to travel, live abroad, put my kids (if we are lucky to have them) through college, maybe buy another house, etc. All of that will factor in my decision when I can declare my independence.
Jason’s Rule of Thumb #3 For Me (not you): What do I want to do when I am financially independent. The vast majority of people who retire don’t stop working and doing things. I love to play golf and travel and eat well and so forth. But I can only do that so much. I like also just being home, writing a research paper or whatever. I LOVE teaching. I love being in the classroom. Does that mean I teach when I “retire?” I love giving advice and personal finance. Does that mean I pick up a new career?
I like being busy. I need to do things or I just become lazy. My whole goal has been that I want to be able to set my own schedule and do things when I want too. And if that means one semester I don’t teach and we go live in Ecuador so be it.
Jason’s Rule of Thumb #4 For Me (not you): I need to have some F* you money. The blog jlcollinsnh.com has a great post on the need for F*you money. Before I go further if you want a great primer on investing than read this blog, particularly his investing series. Take the time and binge those articles. They are easy to read and FANTASTIC! Now I am not sure F-you money I need to but I need a bit in cash (perhaps a few months to a year’s worth) to say enough is enough with the working world.
Jason’s Final Verdict: How Much Do I Need (not you): If you were to ask me right now how much I need, just doing a rough estimate, in order to travel, etc. I would think it would be somewhere around $1.5 million. Now it could be more or less. The most important thing is me paying off debt and then seeing how much spending we engage in. But based upon some of my tracking and the like when the mortgage is paid off and I don’t have to send away redonkulous amounts of money for loans I think that we could live quite comfortably on about $5000 a month.
Some of you look at that number and think jeez I could never save that much or if you a part of the personal finance blogosphere you might be like: Jason cut down your lifestyle. What are you doing eating Filet Mignon every night (that would be nice…I do love me a Filet).
That is why this is personal. These are MY RULES OF THUMB! Not yours. Now I do think that everyone should at least be debt free when they arrive at financial independence. If that means you don’t take a vacation, fine so be it! But again that is up to you. You need to figure that out for yourself, which is probably why you need to TRACK YOUR SPENDING! And the big thing START INVESTING NOW!!!!! I don’t care if you are going to work until you drop. I thought the same thing, but I have had a change of heart over the past year or so. I don’t want to work like some of my colleagues until I am 75 or 80. That is not for me.
That doesn’t mean I won’t work and probably earn some income by teaching, consulting, or getting some mindless job. The whole point for me is that I want to get to the point of Financial Independence sooner rather than later.
And I am slowly getting there. I hope to be there actually by the time I am 50. That may mean I stop working. But it is high time in this country that we start paying off debt and saving more. But you have to decide what that number is for you.