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How to find your retirement number

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Brian Stoffel
Brian Stoffel

This document outlines 8 steps to calculate a retirement number: 1) Determine current annual spending 2) Subtract rent/mortgage if paid off in retirement 3) Subtract life/disability insurance if not needed in retirement 4) Reduce food budget based on age 5) Reduce transportation budget based on age 6) Increase healthcare spending based on age 7) Subtract estimated social security benefits 8) Multiply final annual spending by 25 to get retirement number

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How to Find Your “Retirement Number”
Step 1: How much did you spend this year? This might take some work, but it’s important. ? You can use tools like mint.com, or personalcapital.com to help. For the purposes of this article, I’ll use my family’s 2014 total spending as an example: $50,000
Step 2: Subtracting Rent/Mortgage
Step 2: Subtracting Rent/Mortgage Many people expect to have their homes paid off by the time they retire. ? If that doesn’t include you, ignore this step. ? Otherwise, subtract out the amount you paid in rent/mortgage this year from your overall spending. In 2014, my family spent $10,200 on this. We expect to own our home by the time we retire, so we feel comfortable subtracting this. New spending total: $39,800
Step 3: Subtracting Life or Disability Insurance
Step 3: Subtracting Life or Disability Insurance The whole idea behind life and disability insurance is that it protects future cash flows in the event of catastrophe. ? If you’re retired, there aren’t any future cash flows to protect. ? In some cases, however, it still makes sense to keep some insurance. In 2014, my family spent $3,240 on whole, term, and disability insurance. We feel comfortable subtracting this—knowing that we’ll add in costs for long-term care insurance in step #5. New spending total: $36,560
Step 4: Reducing Your Food Budget
Step 4: Reducing Your Food Budget In retirement, you generally spend less money on food—kids have moved out and people prepare more of their own food. Depending on your age right now, here’s how much the Bureau of Labor Statistics found that food and alcohol budgets shrunk for those 65 and older: – 25 to 34 years old: 17% – 35 to 44 years old: 34% – 45 to 54 years old: 35% – 55 to 64 years old: 23% In 2014, my family spent $5,750 on food and alcohol. Currently, we are right on the border of 34 to 35-year old family. We go to our local coffee shop often in the winter, to help our one-year-old daughter get out of the house. We feel comfortable reducing this budget by 20%, or $1,150. New spending total: $35,410.
Step 5: Reducing Your Transportation Budget
Step 5: Reducing Your Transportation Budget In retirement, folks generally drive less since they are no longer commuting. After the first couple of years, they also tend to take fewer long-distance trips. Depending on your age right now, here’s how much the Bureau of Labor Statistics found that transportation budgets shrunk for those 65 and older: – 25 to 34 years old: 26% – 35 to 44 years old: 36% – 45 to 54 years old: 37% – 55 to 64 years old: 29% In 2014, my family spent $7,000 on transportation, with half of it being in the form of airline flights. Though I’d like to believe we’ll still travel as much, I know that likely won’t be the case. To keep it optimistic, I’ll only reduce costs by 20%--of $1,400—here. New spending total: $34,010.
Step 6: Increase Healthcare Spending
Step 6: Increase Healthcare Spending Here is the one area where expenses normally do rise. Of course, this will vary greatly, and in some ways is unpredictable. That being said, depending on your age right now, here’s how much the Bureau of Labor Statistics found that healthcare budgets grew for those 65 and older: – 25 to 34 years old: 130% – 35 to 44 years old: 59% – 45 to 54 years old: 33% – 55 to 64 years old: 16% In 2014, my family spent $7,430 on healthcare—including insurance premiums. I’d like to build in a margin of safety, so I’m going to increase our expenses by 100% in this realm, or add $7,430. New spending total: $41,440.
Step 7: Subtract out Social Security Benefits
Step 7: Subtract out Social Security Benefits You can get a ball-park estimate for your future benefits by visiting this site here. It’s worth noting that if the government doesn’t take any steps to bridge Social Security’s funding gap, experts estimate that benefits will be cut by 22% to 29%. The Social Security estimator tells me that I will receive $22,800 per year if I retire at 65 and keep earning about the same salary. To build in a margin of safety, I will reduce this number by 25% to $17,100. New spending total: $24,340.
Step 8: Find Your Retirement Number
Step 8: Find Your Retirement Number Take your total, and multiply it by 25. Having this amount, in theory, would allow you to take out 4% of your nest egg in your first year of retirement, and adjust it for inflation every year thereafter. However, it’s crucial to remember that these are just ballpark figures. Remaining flexible and finding a professional to help are both key ingredients for nailing down your retirement goals. After taking Social Security into consideration, my wife and I have a retirement number of $608,500. If we want to retire early, or disregard Social Security entirely, our retirement number would be $1,036,000. Does your number surprise you?
The Secret Behind the Overlooked $60,000 Social Security Bonus

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How to find your retirement number

  • 1. How to Find Your “Retirement Number”
  • 2. Step 1: How much did you spend this year? This might take some work, but it’s important. ? You can use tools like mint.com, or personalcapital.com to help. For the purposes of this article, I’ll use my family’s 2014 total spending as an example: $50,000
  • 3. Step 2: Subtracting Rent/Mortgage
  • 4. Step 2: Subtracting Rent/Mortgage Many people expect to have their homes paid off by the time they retire. ? If that doesn’t include you, ignore this step. ? Otherwise, subtract out the amount you paid in rent/mortgage this year from your overall spending. In 2014, my family spent $10,200 on this. We expect to own our home by the time we retire, so we feel comfortable subtracting this. New spending total: $39,800
  • 5. Step 3: Subtracting Life or Disability Insurance
  • 6. Step 3: Subtracting Life or Disability Insurance The whole idea behind life and disability insurance is that it protects future cash flows in the event of catastrophe. ? If you’re retired, there aren’t any future cash flows to protect. ? In some cases, however, it still makes sense to keep some insurance. In 2014, my family spent $3,240 on whole, term, and disability insurance. We feel comfortable subtracting this—knowing that we’ll add in costs for long-term care insurance in step #5. New spending total: $36,560
  • 7. Step 4: Reducing Your Food Budget
  • 8. Step 4: Reducing Your Food Budget In retirement, you generally spend less money on food—kids have moved out and people prepare more of their own food. Depending on your age right now, here’s how much the Bureau of Labor Statistics found that food and alcohol budgets shrunk for those 65 and older: – 25 to 34 years old: 17% – 35 to 44 years old: 34% – 45 to 54 years old: 35% – 55 to 64 years old: 23% In 2014, my family spent $5,750 on food and alcohol. Currently, we are right on the border of 34 to 35-year old family. We go to our local coffee shop often in the winter, to help our one-year-old daughter get out of the house. We feel comfortable reducing this budget by 20%, or $1,150. New spending total: $35,410.
  • 9. Step 5: Reducing Your Transportation Budget
  • 10. Step 5: Reducing Your Transportation Budget In retirement, folks generally drive less since they are no longer commuting. After the first couple of years, they also tend to take fewer long-distance trips. Depending on your age right now, here’s how much the Bureau of Labor Statistics found that transportation budgets shrunk for those 65 and older: – 25 to 34 years old: 26% – 35 to 44 years old: 36% – 45 to 54 years old: 37% – 55 to 64 years old: 29% In 2014, my family spent $7,000 on transportation, with half of it being in the form of airline flights. Though I’d like to believe we’ll still travel as much, I know that likely won’t be the case. To keep it optimistic, I’ll only reduce costs by 20%--of $1,400—here. New spending total: $34,010.
  • 11. Step 6: Increase Healthcare Spending
  • 12. Step 6: Increase Healthcare Spending Here is the one area where expenses normally do rise. Of course, this will vary greatly, and in some ways is unpredictable. That being said, depending on your age right now, here’s how much the Bureau of Labor Statistics found that healthcare budgets grew for those 65 and older: – 25 to 34 years old: 130% – 35 to 44 years old: 59% – 45 to 54 years old: 33% – 55 to 64 years old: 16% In 2014, my family spent $7,430 on healthcare—including insurance premiums. I’d like to build in a margin of safety, so I’m going to increase our expenses by 100% in this realm, or add $7,430. New spending total: $41,440.
  • 13. Step 7: Subtract out Social Security Benefits
  • 14. Step 7: Subtract out Social Security Benefits You can get a ball-park estimate for your future benefits by visiting this site here. It’s worth noting that if the government doesn’t take any steps to bridge Social Security’s funding gap, experts estimate that benefits will be cut by 22% to 29%. The Social Security estimator tells me that I will receive $22,800 per year if I retire at 65 and keep earning about the same salary. To build in a margin of safety, I will reduce this number by 25% to $17,100. New spending total: $24,340.
  • 15. Step 8: Find Your Retirement Number
  • 16. Step 8: Find Your Retirement Number Take your total, and multiply it by 25. Having this amount, in theory, would allow you to take out 4% of your nest egg in your first year of retirement, and adjust it for inflation every year thereafter. However, it’s crucial to remember that these are just ballpark figures. Remaining flexible and finding a professional to help are both key ingredients for nailing down your retirement goals. After taking Social Security into consideration, my wife and I have a retirement number of $608,500. If we want to retire early, or disregard Social Security entirely, our retirement number would be $1,036,000. Does your number surprise you?
  • 17. The Secret Behind the Overlooked $60,000 Social Security Bonus

Editor's Notes

  1. http://pixabay.com/en/money-bills-calculator-save-256312/
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