How much do I need to retire?
How much do I need to retire: a calculator
I'm a firm believer that everyone should have "a number": a goal for their investments and financial efforts. It can be a little uncomfortable thinking about how much money you want in life, and might feel hedonistic or greedy for some, but the process of finding how much you need for retirement is actually one of the best ways to stay focused on the things you truly need to avoid wasting money on the stuff that you don't. I'll go into more detail below, but the process is fairly simple:
Make a list of the things you actually need (with some reasonable wants too, we're all human...)
Figure out what those things will cost you per year
Figure out how much you need to support that income with the calculator at the end of the post
Stick to your number, even when you have extra money beyond it
By defining your necessities and arriving at a number before you actually achieve financial independence, you can stay focused on what you need in life and avoid the hedonic treadmill. It's also a great way to make sure that you're saving enough to reach financial independence when you want to. Enough talk, here's my easy retirement calculator. Make sure to read on below for why this is so important:
It's important to know how much is enough for retirement
I got to thinking about all of this a long time ago when I started working at a wealth management company and I noticed a couple of things that surprised me. The company was small, but the clients were all required to have a net worth over $10m. Most of them had much much more than that. These weren't the "millionaires next door", they were the plutocrats across the lake.
The first thing that surprised me was how much better the ultra-wealthy have it. We expect that rich people will get better service from the valet, but from a financial perspective they have access to opportunities we would never dream about. I remember vividly that one client had access to such a low margin rate from Schwab that he had bought $10m in short-ish term government bonds on margin and was making 1% on top of what he had to pay for the margin loan. This was at a time of much higher interest rates too, so although he exposed himself to interest rate risk, he actually ended up making close to $1m over the course of the trade as rates fell. This isn't particularly pertinent to this discussion, but it's important to remember that wealth begets wealth.
The other thing that surprised me was how much the clients spent. Admittedly, expenses varied from client to client but I would say there were at least 4 "Wolf of Wall Streets" spending every dime they could for every one Warren Buffet saving pennies and eating at McDonalds. I remember one client couldn’t land his Gulfstream (a very expensive, larger private jet) at the airport nearest his ski cabin so he bought a smaller jet solely to fly to that location. Nuts.
The point? It’s easy to continue justifying more and more and more spending. Even at excessive spending levels, things eventually feel “normal” and boring, and the only way out is more spending. That’s the hedonic treadmill, and it’s something that’s worth trying to avoid.
They key to retiring, and knowing how much you need to retire, is being comfortable with what you have. If you can live on less, you need less. There’s no problem with working hard for the future and trying to make life easier or more comfortable, but if you aren’t happy in the present there isn’t much point in getting more and more.
That’s why I took the time to ask myself what I REALLY needed, and built my retirement number from there.
How much is enough retirement savings for me
At some point, we all have to make a personal decision about how much stuff, and therefore how much money, we need in our lives. As much as I'd WANT a ski house in Aspen or a Gulfstream, they probably wouldn't make me any happier. So, I made a list of the things that I felt I truly needed, as well as a "wish list" of things that I had always wanted to have, do, or see... within reason.
I know I'm not the first one to think of this, but I generally found that the things that I could justify for my "wish list" were experiences with the people that I love, or things that I could share with them. Since you can justify almost anything with that line of reasoning, I made another rule for myself: no yachts, no planes, and no vacation homes. Others may feel differently, and that's totally fine. It's my list, and that's what's on it.
After making my lists, I tallied up everything on them into an annual income number. Then, I used that number -along with the 4% rule and my desired date of retirement- to figure out the lump sum I need for retirement. As I build my own wealth, and document the process in this blog, that's the number and the goal that I am working towards.
Hopefully someday I'll sail right past it, which brings me to my last rule: anything over my number goes to charity. I've already documented everything that I need or want in life (including my loved ones needs), so why not share once I've met that? I could likely be much more charitable, in fact, but that's a subject for another day. The important thing is that I made a plan to avoid endlessly upgrading everything in my life, even after I have more than enough