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Playing With Your Plan
Remember in Lesson 6 that we introduced the "multiply by 25" rule -- the rule that presumes you can earn a four percent real (or after inflation) rate of return on your savings once you stop working. Another way of expressing it is to say that you need to put aside $25 to fund each $1 of annual spending in your budget. If your total annual spending in retirement will be $50,000, the "multiply by 25" rule indicates that you need to save $1.25 million before giving up the paycheck.

One benefit of this rule, in relation to plan review, is that it allows you to consider various scenarios. What if it were possible to cut your retirement spending to levels well below your current spending? If you pay your mortgage off before retiring, that cost goes away. If you move to a small town away from employment centers, the costs of living in general may decline. You probably will not feel a need to continue adding to savings once you've reached your retirement goal. And, if reducing these expenses allows you to get by on less income, you'll lower your tax burden as well. So taking the above assumption, if you were able to bring your annual spending in retirement down to $30,000, the "multiply by 25" rule indicates that you would need to put aside $750,000, a considerably smaller sum.

Another way to use this rule is to apply it on an expense-by-expense basis. If you spend $200 per month eating out, you need to save $60,000 to fund that $2,400 annual expense indefinitely. Cut that one expense in half, and you reduce the amount you need to save for retirement by $30,000. Depending on how long it takes you to save $30,000, that may represent a significant reduction in how long you need to work to fund a retirement.

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