Calculating Your Retirement Number
For decades the financial services industry has hidden the secret of discovering your retirement number. Because I am an outsider, today you will know the most hidden secret of this industry.
Let us start by explaining what a retirement number is. A retirement number is the amount you need in savings (Nest Egg) to live the lifestyle you want. It may seem like a complicated number to calculate, but with the magic of simple algebra, I can make you a pro by the end of this article.
I wish I came up with this magical formula myself; nevertheless, I do have to give credit where credit is due. The formula we will use is called The 4% Rule. The 4% Rule was founded by three finance professors at Trinity University. The rule states that using a portfolio withdrawal rate of 3% or 4%, historically, there has never been a time where a retiree would run out of money in a 20 or 30-year period.
This was a big discovery. Running out of money and having to work at Walmart is a fear for many retirees. This fear is what makes this information so important. This knowledge can alleviate many of those fears and help those who wish to accumulate wealth to have a number to shoot for.
The next term you have to learn is withdrawal rate. A withdrawal rate is the percent of your portfolio you will withdraw or divest and convert to cash to fund your lifestyle in retirement. The last term you will have to learn is Guaranteed Fixed Income Securities. Guaranteed Fixed Income Securities represent assets like the pensions, social security, and annuities you have accumulated over the years.
Now it is time to do some simple algebra. I will assume you have decided to no longer work, so earning extra income is not an option.
Here we go
(Yearly Living Expenses¹ – Yearly Guaranteed Fixed Income²) / 4% = Retirement Number
¹Yearly Living expenses should account for incremental healthcare needs and potential nursing home expenses.
²Guaranteed Fixed Income is assumed to be inflation adjusted.
Example: Samantha is a single woman who is about to retire. She estimates her yearly living expenses to be about $80,000 per year including medical expenses. She has an old pension from a previous employer that will pay her $12,000 per year. Her Social Security payment will total $24,000 per year. This results in her total guaranteed fixed income to total $36,000 ($12,000 + $24,000) per year, which is expected to increase yearly at the rate of inflation. If she uses the equation above, her retirement number would be:
($80,000 – $36,000) / 4% = $1,100,000
Samantha should aim to save $1,100,000 to cover her living expenses.
Not too bad right? Remember this number is an approximate number and should only be used as a guide. I hope the 4% Rule gives you an idea of what is needed to retire to sustain your lifestyle.
Randall Avery
Financial Advisor │ Author │ Public Speaker
R.S.A. Deasil Advisors, LLC
Office: 531-333-2745
Email: Deasil@rsadeasil.com
Website: www.rsadeasil.com
P.S. If you would like me to speak at your next event, please click HERE
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While working with clients, Randall realized there was a missing process that individuals were not performing when choosing to use their money. Motivated to fill this gap, Randall developed three models to ‘Hack The System’ and allow individuals to Create Your Own System (CYOS). Randall hopes effectively using these models will help individuals identify the best moral and ethical use of their money.
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