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. One particular family is burned into my memory, we'll call them the Joneses. I feel a little bad for recounting their story, because they are genuinely decent people and they were always really kind to me personally. But, collectively, the Joneses spending habits were my introduction to the hedonic treadmill and the importance of defining your needs as early as possible in life. I think their story is worth sharing so others can avoid their fate, although I am changing some pertinent details to keep this anonymous.
Keeping up with the Joneses
In a lot of ways, they were very "normal", in the stereotypical American sense. Dad had started a company and built it brick by brick. Mom raised the kids, and pulled double duty as COO at the business. The kids went to public schools, then college, then graduate studies and eventually decent jobs outside of the family business. But, after 40 years running the business, Dad and Mom decided to sell out and that's when their spending started to catch my attention.
They had had money for a long time, but the sale of the company immediately catapulted their liquid assets from $8m to almost $300m. Dad had given each child $10m. $100m went to Mom for her share of the business, leaving himself a little over $150m.
The kids both had good jobs, earning well into six figures on their own. Their $10m gifts paid them each $10k a month in addition to their own income. Over the course of two years, I watched as they pulled money out every-single-month on top of their $10k allowance. House remodels, new cars, extravagant travel: you name it, they spent it. Slowly - or actually frighteningly quickly when you think about it- I watched both of the kid's accounts dwindle past $9m, and $8m, and $7m. I didn't stay long enough to see how their story ends, but we can safely extrapolate.
Sound bad? Mom was worse. Instead of $10k a month, she had closer to $100k. To put it more bluntly, her monthly discretionary spending money was more than most American households make in a year. But every month she blew past it. She shopped, traveled and threw extravagant parties with 6 figure tabs for the entertainment alone. To be fair, she did live closer to her means than the rest of the family, and she managed to keep her net worth about even at $100m. But, every month she went over her allowance and I couldn't stop wondering how.
That was nothing compared to Dad. Even with a $150k monthly allowance, he would always find new and ingenious ways to spend money. My personal favorite (as an aviation fan), was when he needed to buy a $5m Beech King Air because he couldn't land his $10m Gulfstream III at his favorite ski resort. I mean... if that isn't a 1% problem I have no idea what is. In addition to his outrageous aviation expenses, his real estate purchases were insane. Ski mansions in Aspen and Tahoe, beach houses in San Diego and Hawaii, and numerous condos in major cities across the country. Although most of the things that he bought were assets of some kind, it was still amazing to watch someone burn through almost $30m in cash within a couple year span.
In some ways, it sounds like a dream: to have more money than you could ever spend. But, in reality, it had sent the entire family into an endless hedonic treadmill with no hope of ever permanently finding happiness or contentment with their new found fortune. Worse still, as they spent and spent, they spent less time with one another, jet-setting across one another's paths as they ran on their own personal treadmill.
As I watched this unfold, I realized that I was inherently the same as them. If I had money to spend, I generally spent it. If I had come into a massive lump sum, I probably would have spent that too. We always want more, it's what makes us human. It drives the amazing things that we build, and the horrible messes we make for ourselves as well.
Now, I will likely never be as rich as the Joneses, but their story did make me realize that even within my more reasonable financial existence I could still fall into the same trap. To avoid that, I decided to make a plan.
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. After seeing the saga of the Joneses, I realized that as much as I'd WANT a ski house in Aspen or a Gulfstream, they probably wouldn't make me any happier than they made Mr. Jones. 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