Once you figure out what your goals are for retirement, you can begin calculating Your Retirement Number - the amount your retirement nest egg needs to grow to by the year you plan on retiring - to accomplish your goals for retirement.
Some individuals have a preconceived milestone that they envision reaching. For example, the "$1,500,00 Payday Approach", or some other preconceived milestone, whereby they plan on retiring once they have accumulated $1,500,000 in investments by a certain retirement age.
Other individuals have no particular milestone in mind, they simply want to retire comfortably.
Each investor's situation is different, and Your Retirement Number will most likely be impacted by some or all of the following investment and non-investment controllable and uncontrollable variables:
Investment Variables
(1) controllable variables - Social Security, pensions and guaranteed lifetime income solutions
(2) uncontrollable variables - Sequence Of Returns Risk, Inflation Risk
Non-Investment Variables
(1) controllable variables - when do you plan to retire, where do you plan to live during retirement, the retirement income and lifestyle you envision
(2) uncontrollable variables - your health and longevity (how long you will live), etc.
What Is Your Retirement Number?
Most retirees don’t typically contribute to retirement accounts, do not pay Social Security and Medicare payroll taxes, and have lower day-to-day expenses, so their income requirements are lower than people who are still working.
Fidelity Investments analyzed spending data for working people between the ages of 50 and 65 years old and determined that most retirees need to replace between 55% and 80% of their pre-retirement income in order to sustain their current lifestyle.
There are several popular methods that can be used to estimate how large your retirement nest egg must grow to. We utilize two different methods as a checks and balance to calculate how large your investments need to grow to when you retire:
(1) Fidelity Investments Save 10 x Your Salary By Age 67
Fidelity has perhaps the most simple and useful guideline to estimate how large your retirement nest egg must grow to:
(1) Aim to save 1 x your salary by age 30,
(2) Aim to save 3 x your salary by age 40,
(3) Aim to save 6 x your salary by age 50,
(4) Aim to save 8 x your salary by age 60, and
(5) Aim to save 10 x your salary by age 67.
(2) The Eighty Percent (80%) Multiplier Rule
The Eighty Percent (80%) Multiplier Rule is another well-known, straightforward and useful guideline that we like to use to estimate how large your retirement nest egg must grow to.
The 80% Rule factors in your social security, your longevity, return on investment and inflation into the analysis to determine:
(1) Your Retirement Number - the amount your retirement nest egg needs to grow to by the year you plan on retiring - to accomplish your goals for retirement,
(2) the future value of your current retirement investments by the year you plan on retiring,
(3) the investment shortfall, or excess, your current investment portfolio is projected to have by the year you plan on retiring, and
(4) the annual investments required to achieve Your Retirement Number by the year you plan on retiring.
How Does The Eighty Percent (80%) Multiplier Rule Work?
The best way to understand how the 80% Rule works is to walk through an example. To that end, please review the following PDF.
