Many investors have their "number," or the amount of money they think they'll need to retire completely comfortably. Some investors don't use a specific number, but have other ways of keeping track of their progress toward a comfortable retirement.
We asked three of our contributors to explain how they came up with their own retirement numbers. Here's what they had to say:
It would be silly to quote an exact retirement number right now, simply because I'm only in my 30s and a whole lot can happen between now and retirement age. However, having said that, I'll tell you my current "number": $1,475,000.
How did I come up with this? Well, I figure that for my wife and me to have the kind of lifestyle we want in retirement, we'll need income of about $100,000 per year. According to the quick calculator from the Social Security Administration, we can expect Social Security income of about $41,000 per year, if we retire when I'm 67. So we'll need $59,000 in annual income from our retirement savings.
Using the traditional "4% rule" of retirement, which is a decent guideline (but isn't perfect), we would need savings of $1,475,000 to ensure that our money is likely to outlive us.
There are, of course, factors that could cause our plans to change. First, and most important, these figures are in 2015 dollars, and who knows what inflation is going to do over the next 30 years or so? We could see a 1% average inflation rate, or we could see 5% inflation. There's no way of knowing for sure. And if we decide to retire early, we'll need to factor in other expenses, such as health insurance until we qualify for Medicare.
The point is that while it's a good idea to have a number in mind to have a concrete goal to strive for, it can (and probably will) change over time.
I'm a big fan of having not just a baseline retirement number but also some higher numbers that represent stretch goals for your finances. For me, $1 million is a reasonable and achievable first threshold, as it would provide ample income in retirement to meet basic needs and protect against unforeseen additional expenses.
On top of that, though, figuring out supplemental retirement savings for particular wishes can be helpful. For instance, those with expensive hobbies can build in a specific retirement fund intended to provide the money you need to pursue them without jeopardizing your ordinary finances. Similarly, those who know they'll want to travel extensively can build a separate travel budget and fund those expenses with supplemental savings. Although it's a stretch goal, adding another $1 million to bring your total retirement number to $2 million can obviously build in a lot more security and a higher standard of retirement living.
Obviously, your financial circumstances can change, and the value of having a fixed retirement number can turn into a trap if you get too wedded to the idea of an unchanging milestone. But having a ballpark estimate is useful for evaluating whether your savings are on track or you need to work harder to make the most of your savings and investments.
I, like many of you, belong in the camp of not having a specific retirement number in mind. My idea of a retirement number vacillates somewhere between having just enough to comfortably do as I please and Wall Street: Money Never Sleeps fictional character Bretton James, who replies that his magic number is "More!"
The reason I'm shy about setting a fixed date or dollar amount as a retirement goal is that the dynamics of our lives are more than likely going to change. Some of us will get married and start families, while others will make large later-in-life purchases such as a home or boat. Furthermore, it's impossible to predict how long our bodies or the companies we're employed by will let us work. These dynamics pretty much require us to allow our retirement number to flexible, and to be able to revisit this number on a somewhat regular basis.
Instead, I prefer a method similar to Dan, in that I have psychological dollar marks I can check off that make me feel accomplished but never leave me complacent enough that I don't feel challenged to reach the next level. As someone who had debt throughout my college years and is now debt free, the simple weight-off-my-chest feeling of having more of a buffer to fall back on is my personal driving force.
Taking into consideration the aforementioned changing dynamics of our lives and the fact that U.S. life expectancies are longer than ever, we all should also consider actively investing well after we retire whether or not you have a specific retirement number in mind, like Matt, or have a looser number or idea, such as with Dan and me.