## How do I establish a retirement "number"?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Traveler
Posts: 655
Joined: Fri Aug 30, 2013 9:07 pm

### How do I establish a retirement "number"?

I just read the oversaving thread and it seems that many of you have a nest egg number that once hit (or hit plus a margin), you feel free to retire.

So if you're years away from retirement, how do you establish the number? Many calculators I've seen use a percent of annual income as a means of calculating retirement income needs. However, I don't think my pre-retirement income has much of anything to do with what my needs will be in retirement (it should be more about my pre-retirement expenses).

I'm 41 and single with low to moderate expenses and a moderately high income now. However, I find it challenging to determine what my expenses might be in 15-20 years. Any thoughts? Thanks!

Dutch
Posts: 1277
Joined: Thu Jun 27, 2013 2:12 pm

### Re: How do I establish a retirement "number"?

I don't want to be a downer, but the only way to "establish a retirement number" is by estimating your expenses in retirement (essential and discretionary).

Start with your current expenses and take it from there.

ajcp
Posts: 645
Joined: Fri Dec 13, 2013 6:44 pm

### Re: How do I establish a retirement "number"?

Personally, I don't. I have a (very) rough estimate assuming I'll need 100% of my current income, but I mainly just use that for fun, because I don't know what my expenses will be either. I just save as much as I can and figure in 30 years when I'm 55 I will have a good idea of what my expenses are. Then I'll go from there.

livesoft
Posts: 62933
Joined: Thu Mar 01, 2007 8:00 pm

### Re: How do I establish a retirement "number"?

You can take current expenses, add/subtract in anything you expect to change, then multiply by 25 and 33. 25 means that a 4% sustained withdrawal rate will cover those expenses and 33 means that a 3.33% sustained withdrawal rate will cover those expenes. If you believe that a pension and/or social security will help, then you can subtract their annual payout from your expenses.

That gets you into the ball park which is all you need. After all, when you are within a year or two of retirement, every year your portfolio value might go up or down by 5 to 8 years of annual expenses. See how 33 - 25 = 8 years.
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jmndu99
Posts: 341
Joined: Sun Jul 14, 2013 4:18 pm

### Re: How do I establish a retirement "number"?

Hi, I dont endorse nor use the people behind this but, I am using this as a start.

Hope you find it helpful

http://www.fool.com/retirement/general/ ... -with.aspx

J

Grt2bOutdoors
Posts: 19506
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

### Re: How do I establish a retirement "number"?

Take your annual expenses less expected Social Security, multiply by 30-35x. Now most will say 25x expenses in savings will be enough, but if you have those savings in a tax-deferred account that is not a ROTH you will be paying some level of taxes on those savings, and in the event you over-saved, it's nice to have a buffer against the unknown. Anyway, this is just a ballpark retirement "number". If you have plans to visit the French Riveria for vacation during retirement, triple the savings number - you will need every penny of it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

sambb
Posts: 2195
Joined: Sun Mar 10, 2013 3:31 pm

### Re: How do I establish a retirement "number"?

This is a good question from the OP. I dont know how to estimate it.

Will i want a sports car? Will I want to pay for my kids education? How many of them? How many years? Professional school? How much will tuition go up? Their kids? Will there be marriages and divorces? Medical expenses? Personal catastrophes? What will the market really do? Any travel - first class or coach? Will I want a second home in a favorable area? How big?
Or do I just want to survive and be comfortable? What is comfortable?
What about lifestyle inflation? Nicer car? Every 3 years? or 10?
Disability? Private nursing? Travel? business opportunities?

So many questions that are impossible to determine, and makes goal setting hard..

or - the most ironic ---

Is it all determined by how much one has - so the goal is dependent on assets in real time, and changes dynamically. For me, this is the most likely.

bhsince87
Posts: 1900
Joined: Thu Oct 03, 2013 1:08 pm

### Re: How do I establish a retirement "number"?

At 41, it's probably going to be hard for you, unless you plant to retire in 5-6 years.

It's a conundrum for sure.
Retirement: When you reach a point where you have enough. Or when you've had enough.

Traveler
Posts: 655
Joined: Fri Aug 30, 2013 9:07 pm

### Re: How do I establish a retirement "number"?

Thank you for your input. I am deciding not to worry about it now - way too many unknowns. I'll just save as much as reasonably possible, be financally prudent, evaluate periodically and hope for the best.

ddunca1944
Posts: 926
Joined: Fri Apr 01, 2011 1:49 pm

### Re: How do I establish a retirement "number"?

We're retired. Never had a "number". We saved as much as possible. About 4 years out, we began figuring out how much we'd need to live on in retirement. Then we subtracted our known pensions and SS. Then we had to figure out whether our nest egg could generate enough to make up the difference.

Six years into retirement we're finding we don't need as much as we'd estimated, so are taking some nice trips.

aquifer
Posts: 320
Joined: Sat Oct 20, 2012 9:01 am

### Re: How do I establish a retirement "number"?

Here's what I did to get a ballpark figure: Current living expenses adjusted for 3.2% inflation until my retirement date gave me my expected expenses. I divided that figure by 3% (my safe withdrawal rate). The result is the number I'm shooting for. I used 6% average return to determine how much I need to invest each year to get there. Any or all of these figures can be debated, but you have to start someplace.

HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

### Re: How do I establish a retirement "number"?

Traveler wrote:I'm 41 and single with low to moderate expenses and a moderately high income now. However, I find it challenging to determine what my expenses might be in 15-20 years. Any thoughts? Thanks!
What's going to change?

Around 40, I figured my number by tracking my expenses... Food, utilities, Property Tax, insurance, gas, etc. Did NOT include my mortgage, because I expected to have it paid off...

Came out to around \$5000 a month.... Throw in another \$12,000 a year for travel, and it's \$6000 a month... Throw in another \$12,000 for health care or other unknowns and it's \$7000 a month...

So that's a pretty good rough estimate... I'll need \$84,000 a year... Multiply that by 25 (4% withdrawal rate), and I need about \$2 million... Since I didn't even include Social Security, there's another large buffer in case I'm off by 20%.

Can you do the same thing? What makes it challenging to determine your expenses in 20 years?

HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

### Re: How do I establish a retirement "number"?

Shooting to replace your CURRENT expenses is certainly a good place to start... Doesn't really work for a 25 year old, but should work fairly well for a 41 year old.

Lets you know if you're on track... If your current expenses are \$10,000 a month (\$120,000 a year), then you're going to need \$3 million... Then check to see if you're on track to have \$3 million. If no, then you better cut expenses a little, and up your savings rate...

sans souliers
Posts: 177
Joined: Sun Apr 08, 2012 1:38 pm
Location: By the Quinnipiac

### Re: How do I establish a retirement "number"?

I'll tell you where I am right now.

I've always lived below my means and have a pretty good understanding of my monthly/yearly expenses, all without benefit of any financial tracking apps - just a plain old-fashioned check register (what folks used to use to keep track of their spending habits and cash balances).

My 401(k), Vanguard taxable & Roth IRA, HSA, and credit union assets total 14.7x my yearly gross salary.

That's my retirement number, and I didn't even try to figure out a number until a couple years ago. Just saved whatever I could without being extreme, stuck with my AA, didn't make any withdrawals from the tax-sheltered accounts, and kept my emergency fund in line with inflation (the EF came in handy when the furnace and water heater both died three weeks into January a few years back).
I was 31 (late, huh?) and flat broke when I began saving for this goal, and retirement life starts May 1, 29 years later.

Don't over-think your destination; just start your journey and take a few R&R stops along the way, whenever the opportunities come up.
Maintain a steady pace, and avoid short-cuts -- only the locals know how to navigate short-cuts anyway. You'll get there just in fine shape.
Sometimes pessimism leaves me pretty well prepared for when things don't go my way, and pleasantly surprised when they do.

carolinaman
Posts: 3329
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

### Re: How do I establish a retirement "number"?

It was pretty easy for me to estimate my retirement income needs when I got within 5 years of retirement. However, it is much more difficult when you are 20 to 30 years away. That is where some of these "rules of thumb" are useful. FWIW, my retirement income (pension + SS) is 78% of my last year's salary. That income is adequate for our needs without any AA distributions. Pretty close to the 80% rule of thumb. Major changes for retirement incomme needs include retirement savings are no longer needed, you likely have no mortgage or expenses for children (college, etc.), and once past 65 you no longer pay SS. Most retirees will pay less in taxes. Conversely, you may spend more on hobbies, leisure and travel. Many think health care is a greater cost for seniors, but so far it has not been as medicare and supplement seems to cover almost everything.

Geist
Posts: 260
Joined: Wed Oct 09, 2013 11:36 pm
Location: Alaska

### Re: How do I establish a retirement "number"?

Right now, I'm still very much in the "accumulating phase" (27 y/o), so my "number" seems both astronomical and phantasmic at the present time. So for now, I'm simply setting my goal to have 25x income in a mix of tax-deferred & after-tax accounts. It's something to work toward, and by simply using a multiple, it's alot easier to establish "goal posts" along the way for me (2x income @ 30 y/o, 6.5x income @ 40 y/o, etc). At this point I don't know what my income or expenses will be 40 years from now, or how inflation will play into things... But I do know that as my income grows, my goal will grow with it, as will my ability to save & invest. It's a (very) rough WAG for now, but until I'm in a position (like in my 50's) to have a better idea of what my realistic expenses might be, I see this as a reasonable goal around which to build & implement my plans.

JoMoney
Posts: 6284
Joined: Tue Jul 23, 2013 5:31 am

### Re: How do I establish a retirement "number"?

I like the idea of:
(Desired Annual Income) x (Life Expectancy in Years) = (Portfolio Balance)
Basically, the IRS "Required Minimum Distribution" formula for an IRA.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Barefootgirl
Posts: 2226
Joined: Tue Oct 06, 2009 7:05 pm

### Re: How do I establish a retirement "number"?

I currently live in an area with a high COL. When I retire, I plan to move to an area with a much lower COL.

It's hard to estimate future expenses based on current location (and much of the current spending is driven by location) - is there a good online calculator that can be used to estimate the difference in COL between two locations?

Thanks, BFG
How many retired people does it take to screw in a lightbulb? Only one, but he takes all day.

Oilburner
Posts: 143
Joined: Fri Mar 08, 2013 12:04 pm

### Re: How do I establish a retirement "number"?

ajcp wrote:Personally, I don't. I have a (very) rough estimate assuming I'll need 100% of my current income, but I mainly just use that for fun, because I don't know what my expenses will be either. I just save as much as I can and figure in 30 years when I'm 55 I will have a good idea of what my expenses are. Then I'll go from there.
This is the way I look at it too. My number is "as much as possible"; being late starters, by wife and I currently max out our 401k and Roth IRA contributions each year.

nordlead
Posts: 739
Joined: Thu Sep 12, 2013 9:09 am

### Re: How do I establish a retirement "number"?

My method is to extrapolate my current expenses by inflation (3%) and multiply by 25. SS is my safety buffer, so if I hit that number with just my retirement portfolio I should be good to go. Some expenses will drop (mortgage, no kids), some will rise (health insurance is the big one).

I use inflation adjusted numbers so I can just plug in new numbers each year and keep a history along with tracking my portfolio size. I can see I had 14% personal spending "inflation" from 2010-2011, but my personal spending "inflation" from 2010-2013 was 2.73% per year. It is pretty volatile though since I bought my house in 2009, paid for 0% financed furniture in 2011 (bought in 2010), bought a car in 2012 etc... 2013 was a pretty cheap year, but I expect 2014 to be my second most expensive year on record.

My current projections show I can retire at 59-60. Since that is 30 years away, I totally expect this to be way off. Hopefully my portfolio size estimate will be low and my expenses estimate will be high, but you never know. Worst case scenario says I retire at 67 (FRA) and my portfolio plus SS will be plenty.

@barefootgirl

I think this is a fun tool to play with - http://money.cnn.com/calculator/pf/cost-of-living/ - but I don't know how accurate it really is. I'm assuming it uses the official published COL numbers.

EternalOptimist
Posts: 829
Joined: Wed Nov 07, 2012 12:21 pm
Location: New York

### Re: How do I establish a retirement "number"?

There are many different retirement calculators around (many on this forum) that will give you an indication of what you need. I used a bunch of them and looked for a convergence of the estimates and essentially used that to guide me. I'm retired for 3 years and so far, so good. Obviously there are no guarantees and one must use a lot of common sense. At the end of the day, only you know your life's needs.
"When nothing goes right....go left"

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

### Re: How do I establish a retirement "number"?

A necessary philosophy in addressing this problem is that it is a matter of successive approximations. Even if all the necessary information about investment returns, etc. were known exactly, those are still overridden by all of the uncertainties of life itself including one's future career path, marital status, children, health, new opportunities, failed opportunities, etc. etc. The idea of knowing at age 30 or age 40 what your personal circumstances are going to be for the next 50 years is simply an absurdity. Even the decision to retire as of the date of retirement means taking chances on another 20 or 30 or 40 years of life and all that might bring. The idea that a number exists is just plain nonsense. What is actually going to happen is that life will proceed and one will adapt to what happens, just as one always has.

What one can do is use the various models mentioned to get ideas of what things can look like. One can vary the inputs to see what the difference is and go from there.

ausmatt
Posts: 85
Joined: Sun Jan 02, 2011 1:53 pm

### Re: How do I establish a retirement "number"?

Quick question -- do the 25 and 33 factors account for inflation as well?

Colorado13
Posts: 778
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Location: Colorado

### Re: How do I establish a retirement "number"?

Barefootgirl wrote:I currently live in an area with a high COL. When I retire, I plan to move to an area with a much lower COL.

It's hard to estimate future expenses based on current location (and much of the current spending is driven by location) - is there a good online calculator that can be used to estimate the difference in COL between two locations?

Thanks, BFG
Here's another COL calculator: http://www.bestplaces.net/cost-of-living/

nordlead
Posts: 739
Joined: Thu Sep 12, 2013 9:09 am

### Re: How do I establish a retirement "number"?

ausmatt wrote:Quick question -- do the 25 and 33 factors account for inflation as well?
The 25 comes from the 4% SWR and 33 comes from 3% SWR. So, the 25x (and 33x) only take into account inflation if you started with inflation adjusted numbers. As I said, I extrapolate out for inflation then multiply by 25.

HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

### Re: How do I establish a retirement "number"?

sans souliers wrote:My 401(k), Vanguard taxable & Roth IRA, HSA, and credit union assets total 14.7x my yearly gross salary.
FYI, gross salary may work for you, but for most people I highly recommend working on 25x-30x your EXPENSES. That works for everyone... Gross salary is much harder to plan around.

For instance, my wife quit her job last year... Our gross salary got slashed in half... but our retirement number didn't change, because it's based on our expenses...

If I get a 10% raise next year, my retirement number will not change, I'll just get there quicker.

HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

### Re: How do I establish a retirement "number"?

johnep wrote:Pretty close to the 80% rule of thumb.
I really dislike the 80% rule of thumb...

Someone making \$100k may spend
\$2000 per month on mortgage
\$1000 per month on savings
\$500 per month on payroll tax (6%)

So her gross income may be \$100k, take away those three expenses in retirement and she only needs \$58k to live the exact same lifestyle... Social Security will probably provide \$24k a year of that, so she really only needs to pull out \$34k a year from her investments to live that exact same lifestyle she did when working a \$100k job... So she only need to replace 38% of her salary.

Every person and situation is different, but the example above applies to a lot of people... People save and pay mortgages and pay taxes... Expenses that don't exist in retirement.

Now some new expenses show up, like healthcare and maybe traveling more... but retirement planning should be based on expenses, not your salary (which salary? Your 40-year old salary? Your 50-year old salary? Your 60-year old salary?)

Grt2bOutdoors
Posts: 19506
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

### Re: How do I establish a retirement "number"?

HomerJ wrote:
Traveler wrote:I'm 41 and single with low to moderate expenses and a moderately high income now. However, I find it challenging to determine what my expenses might be in 15-20 years. Any thoughts? Thanks!
What's going to change?

Around 40, I figured my number by tracking my expenses... Food, utilities, Property Tax, insurance, gas, etc. Did NOT include my mortgage, because I expected to have it paid off...

Came out to around \$5000 a month.... Throw in another \$12,000 a year for travel, and it's \$6000 a month... Throw in another \$12,000 for health care or other unknowns and it's \$7000 a month...

So that's a pretty good rough estimate... I'll need \$84,000 a year... Multiply that by 25 (4% withdrawal rate), and I need about \$2 million... Since I didn't even include Social Security, there's another large buffer in case I'm off by 20%.

Can you do the same thing? What makes it challenging to determine your expenses in 20 years?
You're not accounting for income taxes in your estimate - so either you have \$2 million in cold hard cash lying around or in a ROTH - or you will need more than \$2 million in today's dollars.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
Posts: 19506
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

### Re: How do I establish a retirement "number"?

johnep wrote:It was pretty easy for me to estimate my retirement income needs when I got within 5 years of retirement. However, it is much more difficult when you are 20 to 30 years away. That is where some of these "rules of thumb" are useful. FWIW, my retirement income (pension + SS) is 78% of my last year's salary. That income is adequate for our needs without any AA distributions. Pretty close to the 80% rule of thumb. Major changes for retirement incomme needs include retirement savings are no longer needed, you likely have no mortgage or expenses for children (college, etc.), and once past 65 you no longer pay SS. Most retirees will pay less in taxes. Conversely, you may spend more on hobbies, leisure and travel. Many think health care is a greater cost for seniors, but so far it has not been as medicare and supplement seems to cover almost everything.
The OP will be paying Social Security taxes if he continues to work towards FRA of either 66 or 67, or if the OP continues working past FRA and decides to begin collecting. You work, you pay.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Aptenodytes
Posts: 3751
Joined: Tue Feb 08, 2011 8:39 pm

### Re: How do I establish a retirement "number"?

The premise is wrong. There are scarcely any people here who have calculated a minimum portfolio value beyond which they plan to retire.

The notion of there being such a number is a kind of talisman that fodders idle speculation, but has no practical real-world existence for hardly anyone.

I'm not sure about the details, but I believe the idea entered the public imagination in the 1980s when changes in the financial industry saw a big increase in the number of people in their 30s earning millions per year working insane hours carrying out tasks of dubious morality under unpleasant working conditions (see Liar's Poker). Such people did calculate numbers and they did want out once they achieved them.

Whenever the topic comes up on this forum it is clear from the discussion that there's simply no analog among our participants, outside of perhaps a very tiny minority. People still toss out the term, but they mean almost nothing specific by it.

Grt2bOutdoors
Posts: 19506
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

### Re: How do I establish a retirement "number"?

HomerJ wrote:
johnep wrote:Pretty close to the 80% rule of thumb.
I really dislike the 80% rule of thumb...

Someone making \$100k may spend
\$2000 per month on mortgage
\$1000 per month on savings
\$500 per month on payroll tax (6%)

So her gross income may be \$100k, take away those three expenses in retirement and she only needs \$58k to live the exact same lifestyle... Social Security will probably provide \$24k a year of that, so she really only needs to pull out \$34k a year from her investments to live that exact same lifestyle she did when working a \$100k job... So she only need to replace 38% of her salary.

Every person and situation is different, but the example above applies to a lot of people... People save and pay mortgages and pay taxes... Expenses that don't exist in retirement.

Now some new expenses show up, like healthcare and maybe traveling more... but retirement planning should be based on expenses, not your salary (which salary? Your 40-year old salary? Your 50-year old salary? Your 60-year old salary?)
Aren't you comparing apples with oranges? Is the person in your example pulling \$100K gross or \$100K net? If net, they will need alot more in savings since their lifestyle is supported by an income much higher than \$100K gross.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

The Wizard
Posts: 12441
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

### Re: How do I establish a retirement "number"?

Yes, you need to figure your after-tax "take-home pay" in retirement.
If the bulk of your savings/investments are in tax-sheltered accounts (as mine are) then all your income is taxable in retirement, though you do get some break on SS income.

As for my own "number", I found it reassurring to have the same after-tax take-home pay in retirement as in the year prior to retirement. Once my computations showed I could do that, I was content. No need to completely pay off the mortgage or any other hunker-down tricks...
Attempted new signature...

The Wizard
Posts: 12441
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

### Re: How do I establish a retirement "number"?

Aptenodytes wrote:The premise is wrong. There are scarcely any people here who have calculated a minimum portfolio value beyond which they plan to retire...
Are you sure about this? I think it's possible you might be mistaken.
In my case, I wanted a certain income level which I achieved by annuitizing a portion of my nest egg and taking monthly withdrawals from the balance remaining.
There was a certain minimum number required to make his work, though I padded it by 20% or so in case of market issues...
Attempted new signature...

Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

### Re: How do I establish a retirement "number"?

(monthly expenses assuming all debts paid off) x 12 / .03 = rough ballpark figure

Aptenodytes
Posts: 3751
Joined: Tue Feb 08, 2011 8:39 pm

### Re: How do I establish a retirement "number"?

The Wizard wrote:
Aptenodytes wrote:The premise is wrong. There are scarcely any people here who have calculated a minimum portfolio value beyond which they plan to retire...
Are you sure about this? I think it's possible you might be mistaken.
In my case, I wanted a certain income level which I achieved by annuitizing a portion of my nest egg and taking monthly withdrawals from the balance remaining.
There was a certain minimum number required to make his work, though I padded it by 20% or so in case of market issues...
And when you hit your padded number you quit your job? I don't doubt such people exist, I just think there aren't many of them.

This poll has 14% responding along your lines. That's higher than I would have guessed. I'm happy to be proven wrong.

Watty
Posts: 14592
Joined: Wed Oct 10, 2007 3:55 pm

### Re: How do I establish a retirement "number"?

As others have said it should not be based on your current income.
Among all the other problem while I am working I have to pay;

1) Retirement savings.
2) FICA taxes.
3) Mortgage that will be paid off by the time I retire.
4) Expenses for children, including college.
5) Work expenses; commuting, work wardrobe, work lunches, etc.

It varies by year but for most years this was likely well over 50% of my gross income. There will be new retirement expenses but likely not anywhere near what these are.

You also will have different expenses as you age in retiment.

1) Young active retiree
2) (Hopefully) A naturally slowed down but still basically healthy person in your 70's or 80's.
3) Increased expenses as health and advanced age require more medical care.

So saying that you will need X% of your current income doesn't take these differences into account either.

HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

### Re: How do I establish a retirement "number"?

Grt2bOutdoors wrote:
HomerJ wrote:
Traveler wrote:I'm 41 and single with low to moderate expenses and a moderately high income now. However, I find it challenging to determine what my expenses might be in 15-20 years. Any thoughts? Thanks!
What's going to change?

Around 40, I figured my number by tracking my expenses... Food, utilities, Property Tax, insurance, gas, etc. Did NOT include my mortgage, because I expected to have it paid off...

Came out to around \$5000 a month.... Throw in another \$12,000 a year for travel, and it's \$6000 a month... Throw in another \$12,000 for health care or other unknowns and it's \$7000 a month...

So that's a pretty good rough estimate... I'll need \$84,000 a year... Multiply that by 25 (4% withdrawal rate), and I need about \$2 million... Since I didn't even include Social Security, there's another large buffer in case I'm off by 20%.

Can you do the same thing? What makes it challenging to determine your expenses in 20 years?
You're not accounting for income taxes in your estimate - so either you have \$2 million in cold hard cash lying around or in a ROTH - or you will need more than \$2 million in today's dollars.
True... I plan to retire at 55... My wife is 8 years older than me, so she'll be 63.... We'll probably use her SS check to even out any problems with my estimates...

HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

### Re: How do I establish a retirement "number"?

Grt2bOutdoors wrote:
HomerJ wrote:
johnep wrote:Pretty close to the 80% rule of thumb.
I really dislike the 80% rule of thumb...

Someone making \$100k may spend
\$2000 per month on mortgage
\$1000 per month on savings
\$500 per month on payroll tax (6%)

So her gross income may be \$100k, take away those three expenses in retirement and she only needs \$58k to live the exact same lifestyle... Social Security will probably provide \$24k a year of that, so she really only needs to pull out \$34k a year from her investments to live that exact same lifestyle she did when working a \$100k job... So she only need to replace 38% of her salary.

Every person and situation is different, but the example above applies to a lot of people... People save and pay mortgages and pay taxes... Expenses that don't exist in retirement.

Now some new expenses show up, like healthcare and maybe traveling more... but retirement planning should be based on expenses, not your salary (which salary? Your 40-year old salary? Your 50-year old salary? Your 60-year old salary?)
Aren't you comparing apples with oranges? Is the person in your example pulling \$100K gross or \$100K net? If net, they will need alot more in savings since their lifestyle is supported by an income much higher than \$100K gross.
\$100k gross.. Someone making 100k gross (a very good living in 90% of the U.S.) may only be spending \$50k net on everything else excluding taxes, mortgage and savings... Since mortgage and savings completely disappear in retirement, and taxes go down quite a bit, that \$50k net number is really what needs to be replaced, not the full \$100k gross salary

twindad57
Posts: 123
Joined: Fri Jan 03, 2014 3:30 pm

### Re: How do I establish a retirement "number"?

I am 43 years old. Sorting through this same problem now. My very rough estimate at this point is to take my current annual expenses (\$91,000) and estimate what those would be in future dollars at time of retirement. For me this is 14 years, or age 57. I assumed 3% inflation, so \$91,000 today would be equivalent to \$138,000 at retirement age. From that number I subtracted out my estimated pension of \$47,000. The net is \$138,000 - 47,000 = \$91,000. Random how this worked out to my present day expenses. I then multiplied \$91,000 by my years of retirement. I used 38, assuming a life expectancy of 95 years. 38 * \$91,000 = \$3.5M.

I then plugged that number into several different calculators and played with the assumptions, including inflation, rate of return, variable expenses, etc. In nearly every scenario I end up with a large estate at time of death, ranging from \$3.5M to a silly number. While this is far from perfect, it gives me a rough number to aim for. At 14 years out, I am comfortable that \$3.5M is a good target knowing it is far from 'perfect.' I will continue to refine my assumptions and the target as I move closer to retirement.

Note: I intentionally ignored Social Security because I figure this helps account for expenses I might not be including.

cherijoh
Posts: 4989
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

### Re: How do I establish a retirement "number"?

HomerJ wrote:... Since mortgage and savings completely disappear in retirement
In the general population, assuming that mortgages are paid off by the time of retirement is probably overly optimistic. Lots of refinances mean that many people will extend their mortgages well beyond 30 years and into retirement.

HomerJ
Posts: 11942
Joined: Fri Jun 06, 2008 12:50 pm

### Re: How do I establish a retirement "number"?

cherijoh wrote:
HomerJ wrote:... Since mortgage and savings completely disappear in retirement
In the general population, assuming that mortgages are paid off by the time of retirement is probably overly optimistic. Lots of refinances mean that many people will extend their mortgages well beyond 30 years and into retirement.
Yeah, but not us Bogleheads, right?

coderunner
Posts: 1
Joined: Sat Jun 25, 2016 2:17 pm

### Re: How do I establish a retirement "number"?

Listen up .. way too much meandering on this question!
..
for those that are just starting out in their career path do the following and all will be taken care of:
allocate 50% of your income to needs
allocate 30% of your income to wants
save the remaining 20%
..
yes, its that simple..
============================
now about the "retirement number" ..
use an Excel spreadsheet folks.. categorize your expenses by "food, clothing, shelter, transportation, medical "
forget the stupid "25 / 33" multiplier mentioned here -- its assumptions are too simplistic to be addressed..everyone is different.
schedule out your income and expenses for as long as you expect to live .. right now, the social security administration actuaries base their payouts on the assumption that the average (and you are not average) beneficary lives to be 87. (i'm planning on 100 myself)
for each revenue/expense line -- example part of shelter for me is property taxes -- include an annual inflation estimator if it makes sense and apply it to each year. THIS IS AN EYE OPENENER FOR SURE and makes the exercise well worthwhile.
---
i have a 31 year budget that i update each year based on "ACTUAL" not estimated experience.
...
for most folks, including inflation on relevant line items makes a HUGE difference.

...

Dandy
Posts: 5472
Joined: Sun Apr 25, 2010 7:42 pm

### Re: How do I establish a retirement "number"?

It is hard to predict when you are in your 40's. The only thing you have is your current expenses. So if you have a mortgage and it will be paid off that is a subtraction, so is investing in your 401k, your commuting expenses, etc. What about health insurance from you job - do current retirees get that? You then have a very rough estimate of what your expenses would be if you were retired today. You can estimate pensions and SS to get your approximate retirement income. You can bump your current estimated retirement expenses by some inflation factor say 3% and arrive at a very rough estimate of how much income you will need from your portfolio. Multiply that by the number of years from your retirement age to age 90. That is probably the minimum you will need to have in your portfolio. Add 20% for margin of error.

Look at your savings rate and make sure it is in at least double digits. Try to increase it to at least 15%.

Repeat the above rough estimate every few years - as you get closer to retirement you will have better estimates and you will be able to tell if you are on course.

KlangFool
Posts: 10680
Joined: Sat Oct 11, 2008 12:35 pm

### Re: How do I establish a retirement "number"?

coderunner wrote:Listen up .. way too much meandering on this question!
..
for those that are just starting out in their career path do the following and all will be taken care of:
allocate 50% of your income to needs
allocate 30% of your income to wants
save the remaining 20%
..
yes, its that simple..
============================
coderunner,

Please define what do you mean by income in your context?

Gross income? No way. You have to pay tax.

After tax income? What is your assumption of effective tax rate?

I have an even simpler rule. And, it is based on Gross Income.

Save 1/3, spend 1/3, and pay 1/3 in taxes.

As per your rule, that person is saving 20% of his / her annual expenses per year.

Let's assume that X = annual expense. And, the person is saving 0.2X.

Assuming the goal is to achieve 25X aka Financial Independence, the person would need

A) Continuously employed for 25 years, the person would need annual return rate of 12% over that 25 years

B) Continuously employed for 30 years, the person would need annual return rate of 9% over that 30 years

C) Continuously employed for 35 years, the person would need annual return rate of 7% over that 35 years

As per my rule, the person is saving 100% of his / her annual expense per year.

Assuming the goal is to achieve 25X aka Financial Independence, the person would need

A) Continuously employed for 25 years, the person would need annual return rate of 0% over that 25 years

B) Continuously employed for 20 years, the person would need annual return rate of 3% over that 20 years

C) Continuously employed for 15 years, the person would need annual return rate of 7% over that 15 years

So, how LUCKY do you feel and how LONG do you assume that you will be fully employed?

Pick a number between 0.2X to X.

KlangFool

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

### Re: How do I establish a retirement "number"?

Traveler wrote:I just read the oversaving thread and it seems that many of you have a nest egg number that once hit (or hit plus a margin), you feel free to retire.

So if you're years away from retirement, how do you establish the number? Many calculators I've seen use a percent of annual income as a means of calculating retirement income needs. However, I don't think my pre-retirement income has much of anything to do with what my needs will be in retirement (it should be more about my pre-retirement expenses).

I'm 41 and single with low to moderate expenses and a moderately high income now. However, I find it challenging to determine what my expenses might be in 15-20 years. Any thoughts? Thanks!
Estimate your retirement expenses, multiply by 25, lick your finger and hold in the air to judge the wind, prepare to adjust as you get closer to actual retirement.

When you are far from the number it doesn't really mater how accurate it is.
Last edited by avalpert on Sun Jun 26, 2016 1:42 pm, edited 1 time in total.

Jackson12
Posts: 922
Joined: Tue Oct 06, 2015 9:44 pm

### Re: How do I establish a retirement "number"?

Traveler wrote:Thank you for your input. I am deciding not to worry about it now - way too many unknowns. I'll just save as much as reasonably possible, be financally prudent, evaluate periodically and hope for the best.
I think this is wise. If you save as much as possible in a mix of tax-advantaged and other assets, live below your means, follow the basic Bogleheads investing and saving suggestions (low-cost index funds,emergency fund etc) and rebalamce and evaluate your plan periodically, you're off to a good start.

I've found the retirement "number" to be a moving target ( as we've neared retirement, health costs soared, some other financial surprises occurred that could affect our savings, etc) and we've had to tweak our number through the years.

There will always be unknown variables. We've always focused on keeping fees low,,our mix of investments in low-cost funds, and saving as much as possible ( again, following Bogleheads principles) . What else can a person do?

Capsu78
Posts: 231
Joined: Wed May 18, 2016 10:30 am

### Re: How do I establish a retirement "number"?

I know this is a resurrected thread so I will only add that there is very little 40Yo Capsu could have known about "soon we'll be 60 years old" Capsu. A string of mostly good events mixed in with a small portion of less desirable ones. Actual "highest earning years" coupled with not trading in my wife for one with fewer miles being among the better happenstance for where we are today as we walk toward retirement.

Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

### Re: How do I establish a retirement "number"?

So if you're years away from retirement, how do you establish the number?
Does not matter, because it is very likely not going to be accurate no matter how much you try.

What really happens for most people is you dream of being able to sustain an income of \$X, which is likely to change over time as life happens.

Over time when you get past 50 your desire may (or may not) change as well.

At some point you will simply say the income I can generate from SS, pensions if so lucky, and savings which maybe less than \$X, plus the freedom of retirement is worth more to you than your salary and hassle of working.

Or your health or your employer will declare you need to retire and you will make do with what you have.

If you are far from retirement more important is to focus on saving a good amount, 15%-20% is a good target for many, having good insurance, and making sure you keep your employable skills up.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.