How much money do you need to retire, quit working and be financial secure from the rest of your life?
Have you ever thought about that?
It’s an important number, don’t you think? Yet I bet that you’ve probably never spent much time thinking about it, or you could even be avoiding the issue completely because you think the number is too great.
I personally used to be in the second category. Never thought about it and afraid to even begin. It would certainly upset my weekend.
How was I going financially? Broke, of course.
Until I confessed to myself and realised it was an important question.
…More on that later.
Back to the story.
So what I thought I would do was go to a finance professional and ask them how I should be going about calculating this number. After all, they’re the experts aren’t they?
I can’t mention the name for obvious reasons, however his formula he gave me was…
Are you sitting down?
Calculate your current investment assets and multiply that by 5%. That should give you an income figure without having to eat into your capital.
Add the value of your home equity an divide that number by the amount of years you expect to live.
To this, add the income you expect from inheritances.
No kidding, they included this one as well. Again you have to divide that number by the number of years you expect to live.
Add the amount of Social Security you expect to receive.
Add any expected annual pension payments.
Add other royalties, fees, part-time work, etc.
Confused? Did you give up half way? I’m happy to admit that I was a little bit lost.
Just give me the damn number, dude. (Alas, no number forthcoming)
What is obvious here about this calculation, is that it tells you not so much what your number is, it simply tells you what your income is likely to be in today’s dollars based on your current net worth.
For most people, even this vague number would be frightening.
Anyway, an interesting calculation, you should do it yourself even though I don’t totally agree with that.
When I asked the financial planner about forecasting and looking to the future, his words were… “That it was difficult to forecast because there were so many variables that needed to be taken into account.”
Sounds like we have a future politician on our hands.
All the financial planner wanted to do was simply highlight the shortfall and then put me on an investment plan where he could periodically lose my money slowly over 20 years. He was obviously talking to the wrong guy.
Now, what I failed to mention to you earlier was that I was not telling him my personal situation, I just fabricated a typical middle income scenario.
About $60,000 income with an asset base of $600,000. (Clear equity)
Oh, by the way, the financial planner that I was talking to, interestingly enough was about 15 years younger than me.
He went on to say that the rule of thumb – (and this is scary as well), is that in your retirement you will be likely to need less money then what you are spending now. Something about saving on commuting to work costs and not having to buy expensive clothes liked suits and dressy shoes, paying off your mortgage, blah, blah, blah.
So, does that mean that in retirement you’re supposed to live off 50% of your current income, even though right now on 100% of your income you’re just over broke?
Hmmm… Some retirement that would be.
I don’t know about you, but I want to have a lot of fun when I retire and I certainly don’t want live off 50% or even compromise on my current income.
You know it’s an important number to figure out and then work towards. It’s pretty simple actually, no rocket science needed.
Tomorrow I’ll give you a super-fast way to actually calculate this number… Simply by working backwards.
You cannot live in denial with regard to this number, you have to face it and deal with it head on.
Sweeping it under the carpet ain’t going to cut it.