Whether you are currently retired or planning to retire in the near future, there is an important number you need to know. That number is your retirement number. In other words, the amount of money you need to retire or to stay retired.
One of the mistakes many people make is that when they are contemplating retirement they compute their number to determine if they can retire, but then never re-compute that number. As far as I’m concerned, when someone is retired, they need to recalculate their retirement number at least twice a year. The reason is that things change and it is important to monitor your situation. With people living much longer, it’s not unusual for someone to be retired for 20 or 30 years. With people living as long as they do, new expenses arise that are never factored into the equation. After all, just think if you retired 20 years ago, you wouldn’t have to worry about a smart phone bill; today you do. I have no doubt that over the next 20 or 30 years we will see more change and new products that enhance the quality of our life. The problem is there is a cost to these items. That is why it is always important to know your number and make sure it is current. What many people find is that they spend more money than they anticipated in retirement and if they don’t make an adjustment to their lifestyle, they’ll run into problems down the road. The result is that someone in their 80s is running out of money and we all know in this country it’s not a good thing to be old and poor. That is why knowing your retirement number and constantly updating it is so important.
To calculate your retirement number, you need to know what it costs you to live for the year. Remember things such as holiday gifts, vacations, entertainment and absolutely anything else you spend money on, are all part of your cost of living. Because this number is so important, you should not guesstimate; rather, you need to spend time ensuring it is accurate.
Once you’ve determined what it cost you to live a month, then you need to subtract from that number guaranteed payments you are receiving such as Social Security and pension. When you subtract your living expenses from your guaranteed payments, that is the shortfall you will need to cover with your investments. For example, if it costs you $50,000 a year to live and you are receiving $30,000 from pension and Social Security per year, your shortfall is $20,000.
For someone who is retiring in their 60s, my general rule is that you need 25 to 30 times your annual shortfall to make sure that you have enough for retirement. For example, if your annual shortfall was $20,000, you would need a portfolio of between $500,000 and $600,000 to cover your needs. As you get older and in your 70s and 80s, 20 to 25 times your annual shortfall would probably be sufficient.
One last note – when you compute your retirement number, it is also a good time to do a personal family balance sheet. A personal family balance sheet is nothing more than a listing of all your assets and liabilities. By doing a personal family balance sheet you can compute your net worth, which is nothing more than assets less liabilities. Your net worth is important in determining your financial health.
As I’ve mentioned many times in the past, retirement is a brand new concept in the history of mankind. In the old days, retirement was nothing more than getting ready to die; that is not the case today. Today, retirement is round two and to make sure you can enjoy it, you must have a rising income; computing your retirement number will help you achieve this goal.