“So how much money do I need to save to retire?” It’s probably the first question people ponder when they get serious about setting their retirement goals or making a plan for achieving financial independence.
While there are a lot of factors to consider (and you could get overwhelmed if you let yourself), arriving at a target estimate is actually pretty easy.
Exactly how many dollars do you need before you can leave your 9-to5? Figuring out “your number” is helpful for many reasons… not the least of which is having an actual target to take aim at. This will give you a baseline for establishing your own plan for reaching financial independence (or retirement date!).
How To Get Started On My Financial Independence Plan
Calculating “your number” might even be the motivation you need to ramp up your savings rate, if you find that you’re further away from your goal than you’d like to be. So let’s dive in.
Before we do, it’s important to note: none of the information shared is specific advice. Tax situations vary widely, so this approach may not be applicable to your situation. All information shared is intended to help you find the resources you need to succeed in your retirement planning, so please seek advice from a trusted CPA, Financial Advisor and/or Attorney before making decisions as they relate to your own personal situation.
Some background for calculating your financial independence plan: there is a widely accepted rule in the world of personal finance, called the 4% Rule. The math works out like this:
(Amount of money you plan to spend per year in Retirement) x 25 = Target Retirement Savings Goal
It seems too easy… but the 4% rule stems from research done by a financial advisor named William Bengen, and has become a widely accepted retirement savings benchmark.
If you’re not familiar with it, I highly recommend that you pause here, and check out this article. It’s a quick read, and it’s a very good, easy-to-digest summary of the rule. It does a great job of explaining the concept with enough detail to give you confidence in the study and research behind it, while also explaining the assumptions the drove the research (so you understand the context of using it as a guideline). This rule can serve as your basis for planning a financial independence goal.
It’s important to note that not just any investment asset allocation will do if you’re basing “your number” on the 4% rule, (and that’s a topic for another post), but if you first have the general concept of the 4% rule down, the rest of this article will make a lot more sense. And of course, all of the math assumes that you are following the investment allocations suggested by the study, within your own portfolio.
If you’re using the 4% rule as your guide, the research shows that once you retire, if you begin your annual withdrawal rate at 4% of your total invested portfolio (and adjust your withdrawals appropriately for inflation in each subsequent year), your portfolio should last you for the long haul.
In other words, you shouldn’t run the risk of running out of money. This rule can serve as a great benchmark when making a plan for your retirement or financial independence goals.
That sounds like a great place to start, wouldn’t you agree? Now, there are a lot of investment assumptions wrapped into the 4% rule, as well as very specific instructions for how it’s intended to be applied to your portfolio once you pull the “retirement trigger”.
I’m not here to reinvent the wheel and try to explain the rule to you when others have done it so well already, but I do generally subscribe to using this rule as my guiding benchmark. I use it as the basis for my savings goal.
So now that we have our benchmark rule in mind (the 4% rule), here’s the math you need to figure out “your number”. Again, the math works out pretty simply:
(Desired Annual Funds (Per Year) In Retirement) x 25 = How Much You Need To Save + Invest In Order To Retire
As an example, if you hope to have $60,000 per year to spend in Retirement,
You need to aim for a minimum total invested portfolio of a 1.5 million bucks
($60,000 x 25 = $1,500,000).
In this case, according to the 4% rule, you could continue to withdraw your target annual spending amount from your portfolio each year (after adjusting the withdrawal amount annually, for inflation). You could presumably do so for the duration of your retirement, and know that it’s going to last you for the long haul.
Again, I recommend that you read this article if you want a better understanding of how the 4% was established.
Gathering The Inputs To Calculate “Your Number”:
That all sounds pretty simple. But here’s where things begin to require some effort on your part. After all, the math is only as good as the assumed spending rate you use for your calculation.
You want a solid Retirement savings goal. It’s kind of a big deal. So how can you be sure your assumptions are as on-point as possible?
Track. Your. Spending.
You simply MUST do it, if you want any confidence in your financial independence or retirement plan. And I mean allllllll of your day-to-day charges, allllll of the vacations, allllll of the impulse purchases… and you need to do it for at least a full year. Ideally, you’d have a couple of years worth of data to feel especially confident in your spending numbers.
Thankfully, there is an app for that. Our favorite? If you didn’t already know from our previous post on the topic, it’s MINT.
If you don’t have Intuit’s Mint already loaded on your phone. You need to get it, and let it start tracking for you. Please note, this app is free, and RealEstateCohort.com has no affiliation with this app. It’s simply the best tool out there for the job!
Getting yourself an app that reliably tracks your spending, means the numbers for your retirement math will actually hold water. It’s not the most exciting part of the planning process, but the sooner you get started, the sooner you’ll have a reliable range of annual spending to work with – and then you can fine tune your goals accordingly.
So go ahead and dive into the details of your retirement or financial independence planning process, and spend your energy on the more exciting aspect of it all… just make sure you have an app like Mint tracking your spending in the background.
Once your spending numbers feel solid, you’ll feel a LOT more confident in “your number”, and if you’re like me… your brain will start to kick into overdrive on all the possible ways you can achieve your target savings as soon as possible.
Additional Considerations
Once you calculate a benchmark retirement savings goal (perhaps using the 4% rule as your guide), you’ll also want to take a look at any other major driving forces in your life. Is it important to you to retire early? Like sooner than the average (which is around age 62) in the US?
If so, it might be wise to consider the types of account you are saving in, and whether those funds are going to be able to support your goals as you map out your retirement years. A post with more detail on that particular consideration is coming soon.
Is it important to you to leave a meaningful inheritance behind, for the benefit of your heirs? In this case, “your number” might be a padded version of the 4% rule savings benchmark. This is a good example of when it might make sense to secure the advice of a trusted fee-only Financial Advisor or an attorney/estate planner. Then you can put all of the pieces together to make sure that “your number” will allow you to accomplish all of your goals.
Keep in mind, that “your number” (whether it’s calculated with a financial independence plan or retirement in mind), can remain somewhat flexible as you fine-tune your goals and tackle your investment strategy over time. But getting a handle on your target savings goal (or at least a benchmark version of it) is an incredibly helpful exercise. The sooner you do so, the sooner you’ll know how realistic it is to reach your retirement goals. If they feel out of reach, maybe it will highlight where you need to make some savings or spending adjustments.
Why You Should Plan For Financial Independence Instead Of Retirement
Regardless of your unique goals, getting a handle on your plan for financial independence or target retirement savings is central to your Retirement Planning framework. Get it right, and the rest of your financial goals will fall into line.
Perhaps it’s also important to note that Retirement (in this day and age) doesn’t have to look like it did for the previous generation.
After all, what most of us are seeking is not just a Retirement date, but a state of Financial Independence. The two go hand-in-hand, but you may be after one more than the other. Imagine a reality where working becomes optional, regardless of your age… because you don’t NEED to earn any more income to support your spending in the future!
The devil is in the details, as they say, but those details can be fine-tuned over time as you dive into your planning process and determine the things that matter most to you.
For now, if you can calculate “your number” (or even a general ballpark number), that’s a pretty good place to start.
While we have no affiliation with Intuit Mint, we think it’s the very best tool for tracking your expenses over time. Now you know why this process is so central to your financial independence plan.
Ready to put this incredible (free!) app to work for you?
Click the Mint Logo below to download and start tracking your spending today!
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