End of the Year Question: What is Your Retirement Number?

What is your retirement number?

If I were to pay you to quit your job, how much would it be? Is it $1 million, $3 million, or nowhere near these numbers? Many think you can no longer retire with $1 million because of inflation. This may or may not be true depending on your spending goals, income, and longevity.

The problem is many aspiring retirees think of their number as a goalpost without sufficient planning. As a result, they either don’t achieve their goals or over-save — unnecessarily delaying retirement. When you don’t feel like you have enough, no amount of money will give you the peace of mind you are searching for.

The end-of-the-year bull market has me thinking, “Am I over-saving for retirement?” I’ve thought of it long and hard and came up with our “enough” number: $2,500,000.

Let me explain why.

What the averages tell you

According to the U.S. Bureau of Labor Statistics, the average retiree household spends around $50,000 a year in living expenses in 2021. And the average social security check is roughly $1,700 according to the Social Security Administration. That’s $3,400 for a couple or around $40,000 per year.

That means that on average, people would only need to draw down $10,000 from their retirement nest egg to bridge the gap. With the 4% rule, you can safely withdraw that amount yearly from a $250,000 portfolio invested in 50-50 stocks and bonds mix without running out of money in 30 years.

With social security, an average retiree will only need 1/4th of a million dollars to support their needs.

In fact, according to Vanguard, the average retirement balance for people in the 55-64 range is $256,244. However, this figure is a mathematical average number, it’s skewed upward by a few outliers. The median number is only $89,716.

The sad truth is most retirees won’t have enough money to last 30 years.

How I came up with the $2,500,000 number

As an aspiring early retiree, we expect to retire at age 55 with a portfolio 10x as much as the average number. But not to satisfy my ego, but to face reality— Social Security and Medicare are still several years away when we retire.

Having religiously tracked our household expenses for the past ten years, I can state with a high level of confidence that the following spending budget in retirement will work for us:

  • $50,000 for essential expenses (food, clothing, utilities, insurance, etc.)
  • $20,000 for discretionary expenses (travel, entertainment, gifts, etc.)
  • $15,000 for health care (ACA premiums and deductibles, family of four)
  • $15,000 for federal and state taxes

The above totals $100,000, which is a VERY NICE round number to spend during retirement; especially since the house is paid for, and the kids’ college is fully funded. Not to mention, you don’t need to save for retirement when you’re retired.

Again, using the 4% rule, divide $100,000 by .04 to arrive at $2,500,000 number.

But hey, “You’re retiring early. Isn’t the 4% rule meant for retirements with a 30-year duration?” you might ask.

That’s when social security and my wife’s pension will come into the picture. Besides, spending patterns in retirement are rarely constant. Retirees tend to spend more when they’re younger before gradually reducing spending as they age.

Back-testing our number using FIRECalc

One popular tool to test your assumptions is FIRECalc, which can back-test your retirement plan against historical returns as far back as 1872!

In our case, the tool looked at the 113 possible 40-year periods in the available data, starting with a portfolio of $2,500,000 and spending $100,000 adjusted for inflation each year after that.

Here is how a portfolio of 75-25 mix of stocks and bonds would have fared in each of the 113 cycles. The lowest and highest portfolio balance at the end of your retirement was $1,267,522 to $35,447,197, with an average at the end of $9,837,606 (today’s dollars).

Failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 0 cycles failed, for a success rate of 100%.

Without our expected social security income data and my wife’s small pension, the success rate went down to 85.8%— not bad considering I’ve overstated our expenses.

Perform a Monte Carlo simulation

Alternatively, you can use a tool that can perform Monte Carlo simulations to project a range of hypothetical market return scenarios. The simulations are based on a historical performance analysis of asset class returns instead of actual investments.

One such tool is Fidelity’s retirement planner. Being my retirement provider, it already knows our numbers:

The same tool can also show your hypothetical income in detail (yellow represents social security and pension):

Final thoughts

When to retire is such a big decision you need to measure twice and cut once. There are many tools out there that can help you figure out your target number; I’ve only featured two. Play with the numbers (market returns, inflation, longevity, etc.) objectively to get realistic expectations.

Retirement is not an age; it’s a financial number. You can draw down from your 401K or IRA at 59 1/2 without penalties, but if your nest egg has nothing to begin with— you simply can’t.

I wish you all a prosperous year ahead!

No Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

This sheet tells you when to get out of the shit hole
This Sheet Tells You When to Get Out of the Shithole

One of my favorite movies of all-time is American Beauty. The 1999 award-winning film stars Kevin Spacey who played Lester Burnham, a 40-something guy who hated his job and was on the brink of a mid-life crisis. The inflection point was when he saw his daughter’s gorgeous 16-year-old cheerleader friend, Angela Hayes (Mena Suvari), perform during a half-time dance routine at a high school basketball game.
Lester becomes so infatuated with Angela that he began having sexual fantasies with her. He becomes obsessed with youth that he started to live his life like he just graduated from high school. And when he was told that he was about to get laid off, he instead blackmailed his boss for $60,000. He then quits work anyway choosing to work as a crew in a fast-food chain instead– the position with, in his own words, the least amount of responsibility.
But what really caught my attention is the scene where Lester Burnham wonders in his cubicle while seeing a reflection of his image on the monitor, which resembles a guy trapped in a jail cell. With the numbers on the spreadsheet forming the jail bars in his mind, it’s pretty obvious that he felt imprisoned by his job and wanted an escape. A feeling that many people can sympathize.

Benefits of Tax-Advantaged Savings
Tax-Advantaged Savings and Recommended Strategies

According to the National Study of Millionaires by Ramsey Solutions, 8 out of 10 millionaires invested in their company’s 401(k) plan, and that simple step was a key to their financial success. Not only that but 3 out of 4 of those surveyed also invested outside of company plans— mostly …

Why Work ‘Til You Drop When You Can Retire Early in the Philippines?

For many Americans, retiring early in the USA is a lost dream. Sure, staying within your comfort zone has certain advantages: established social connections, proximity to family and friends, and the local culture. But the cost of living— with rising housing, taxes, and healthcare costs— could potentially deplete your retirement …