Nowadays, somebody only need to write “The” and “Number” next to each other and we automatically know what it means: the amount that you need in your nest-egg so that you can finally throw off those corporate shackles and ‘retire’ …
… well, do anything other than ‘work’ for your daily crust.
The only problem is that nobody tells you how to find The Number!
I should know, I read books on the subject and they all focus on rubbish like: “multiply 75% of your pre-retirement’ salary by 13”.
Which has some obvious problems:
1. How do I know what my pre-retirement salary will be?
2. What if I spend more/less in retirement than when I was working?
3. How will I know my money will last?
The reality is that – for most people – there is (and should be) a total disconnect between how you make your fortune and how you spend it!
In other words, just because you earn $x before you retire, it doesn’t mean that you will spend 75% of $x to 125% of $x (as most financial authors assume) in retirement.
So, I came with my own method – and, it worked for me!
Here’s how:
1. Complete a simple spreadsheet of your major (non-investment) personal purchases, income, and living expenses now and over the next 1, 5, 10, and 20 years. Don’t forget to apply the Inflation Adjustment Factors!
2. To help I have listed the typical expenditures of a $100,000 a year lifestyle, a $250,000 a year lifestyle, and a $550,000 a year lifestyle. These should provide some reference points to calculate your own future living expenses.
3. Use the spreadsheet to calculate Your Number and Your Date.
That’s it!
… and, I’m betting that it won’t even resemble your expected final salary – in fact, I’m betting that the number is so damn big’n’scary that you won’t even get there just on any typical salary – even with your 401k maxed π