How much money do I need to retire?

One of the most frequent questions I get is: how much money do I need to retire?

This is a much more complicated question to answer than most grasp. It depends on the returns you can get from now until the day you die, and that isn’t a number you can look up on Wikipedia. It depends on how much savings you have, and how much you can and will save from now until you retire. It depends on inflation over the rest of your life, how much you withdraw each year in retirement, how long until you retire, how long you (and your spouse) will live after you retire, how much you need to live on each year, what tax rates will be over the rest of your life, what kind of accounts you have your money in (tax deferred: traditional IRA and 401k; pre-taxed: Roth IRA; taxable account, etc.), and so on.  

As you can see in the list above, there are so many unknowns and unknowables that you can’t possibly come up with a precise figure. The best you can really do is calculate an estimate. Added to this, so many people make invalid assumptions (including many financial planners, I’m afraid) that they come up with misleading answers. Other people don’t even try because they feel overwhelmed by the process or are just trying to get by from day to day.  

Unless you’re in bad health and expect to die before you stop working, it’s a very good bet you’ll need money in retirement, so this is a number you really should think about. The ostrich technique won’t work here any more than it does in any other part of life.

With this in mind, I believe there is a simple way to derive an estimate that will succeed. Like all simplifications and rules-of-thumb, it’s not fool-proof, but having spent countless hours thinking about it, crunching the numbers, and applying it, I know it works.

My rule of thumb is to multiply the annual amount of money you want live on in retirement by 30. For instance, if you want to live on $100,000 a year in retirement, then you can retire when you’ve saved up $3,000,000. This estimate works at any age, too, whether 20 or 60 (although it’s probably more than you’ll need if you’re over 70–and that’s a high-class “problem” to have).  

A lot of people gasp when they hear my rule, because it’s a lot higher than they expect. Most people don’t have anywhere near that amount saved, and they feel daunted by a number so beyond where they are or believe they can get.

I’ll admit, my “times 30” rule doesn’t assume you have a pension, and it also assumes you won’t get social security. This may seem like a gross simplification, but if you understand the adequacy of pension and social security funding, you may want to be prepared for that money to be reduced or cut altogether (especially if you’re younger than 50). If you believe you’ll get your pension/social security, just use my “times 30” rule for the amount you’ll need beyond those retirement dollars (if you’ll receive $30,000 from social security and need $100,000 a year in retirement, then use 30 times $70,000: $2,100,000).

My “times 30” rule assumes a 3% withdrawal rate. Most assume they can get much better returns and believe they can withdraw more than 3% a year. The empirical evidence is against them–people who withdraw more than 5% a year are likely to run out of money before both spouses die, and people who plan to get 20% returns are living in fantasy-land.  

Most long term tests show that a 4% withdrawal rate provides enough money to last until death. My problem with that plan: it doesn’t provide a margin of safety. Just like I’d prefer to drive over bridges that are designed to handle much more than “expected” loads, I want my retirement plan to be able to handle the unexpected, too, and I believe my “times 30” does this. I use the “times 30” rule personally, so I’m eating my own cooking, here.

Another issue is that most people don’t really adjust for the destructive impact of inflation.  We don’t know what it will be, so we want to be prepared come what may. I think “times 30” does this (along with a retirement plan that protects investments from the ravages of inflation).

Keep in mind, too, your retirement dollar number isn’t something you want to under-estimate. Many who retired around the year 2000 thought the stock market would keep going up and ended up having to go back to work after they retired. That’s not a very good plan. You’ll want more than enough to retire so you don’t end up in that situation.

If “times 30” sounds too difficult to reach, here are some things to focus on that will allow you to get there. First, save as much as you can as early as you can. The impact of compounding makes high, early savings worth a lot more money over time. Einstein called called compounding the eighth wonder of the world, and he knew a thing or two about math.

Second, try to get good returns. Other than saving as much as you can as early as you can, your returns will have the next biggest impact on how soon you can retire. This doesn’t mean take your retirement dollars to Las Vegas or play the lottery, it means investing intelligently. Either work hard to find someone with investing skill, become an expert investor yourself, or buy low cost index funds and stick with them. Don’t try to time the market or switch into and out of funds to get better returns. Make an intelligent plan and stick to it!

Finally, monitor your path and make adjustments as necessary. I review my retirement plan with my wife at least once a year to make sure we’re on track. The way to get on track isn’t to switch investments every three years, but to increase your savings to make up for any short-falls. If you have more than you’ll need, it’s probably because the market is over-valued, so don’t spend that portion thinking you’re ahead. Plus, there’s nothing wrong with reaching retirement early, or with more than you’ll need.

If you save 30 times the amount you’ll need on an annual basis, I believe you can retire right away–whether you’re 20, 40, 60, whatever. This rule isn’t a cure-all, but it’s an excellent aim-point for those who want to reach retirement and then have enough money to enjoy it.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

How much money do I need to retire?