How much money do you need to save to retire? This is an important question that gets a lot of debate but few useful answers. We hear arguments over whether a million dollars is enough, as though there is a single number that applies to everyone. Here I offer an answer based on a proposed retirement spending strategy that takes into account your unique circumstances.
Lately, I’ve been writing a fair bit about a proposed strategy for retirement spending in retirement (first description, adding income smoothing, yearly spending percentages, experimental results using 100 years of investment returns). The focus was on turning a lump-sum portfolio into an income stream for retirement. But we can turn this around and calculate how much you need to save to retire using this spending strategy.
I added another page to the spreadsheet that computes the percentage of a portfolio that you can spend each year in retirement based on a set of inputs you supply. I added a second page to this spreadsheet that collects some more inputs from you and calculates your retirement magic number. I threw in some example figures, but you’ll have to change the values in the yellow boxes to customize it to your own situation (by first clicking on “File” and then choosing “Make a copy”).
The spreadsheet’s example figures are based on a couple seeking after-tax retirement income of $6000 per month (rising with inflation). They plan to retire at 55 and will collect $2000 per month in other income (rising with inflation) starting at age 65. Once retired, they plan to keep 5 years’ worth of spending in safe investments, and the rest in low-cost index stock funds that they hope will beat inflation by an average of 4% per year. Their target life expectancy is 100. Their retirement magic number works out to $1,636,000. So, for this couple, a million dollars isn’t enough. Your mileage may vary.
As with any retirement planning exercise, a challenge is to add the right amount of safety margin. I find that some people in their 30s tend to think they can get by on a very low income. While I could go back to living on $2000 or less per month, I don’t want to. I meet few people over 50 who find that their low spending in youth suits them now that they’re older. It’s certainly true that many people of all age groups waste money in ways that don’t really improve their lives much, but I think it is also true that older people have less capacity for ultra-frugal living than the young have.
As always, I’m interested in feedback on these ideas, particularly if you see any problems. I hope this spreadsheet helps some people, but as always, I can’t guarantee anything about the results it produces. Think for yourself.