The other thread has gotten so long and so off track so…
Assume that a single person wants to have an upper middle class lifestyle. Assume 30 year projected life span. What is the ‘magic’ number?
Some of the FIRE people seem to suggest 25 times annual expenses. In that case, if the investment gains are 4% after taxes and inflation, that amount of money should last indefinitely.
If you have a more conservative estimate on investment gains, then you may want a higher number.
If you are willing to consume principal because you do not expect to live beyond 120 (or whatever), then you may be able to use a lower number.
However, be sure to consider unexpected “one time” expenses that can come up occasionally (e.g. medical bills), or expenses that occur only once every several or many years (e.g. replacing roof or appliance in the house, replacing car). Also, medical insurance may be subsidized by your employer; be sure to consider costs of that in retirement (which can be substantial if you retire before you are eligible for the socialized insurance subsidy of Medicare; even after, there are still some costs to pay). If retirement activities that you plan to do but are not doing now are expensive, those need to be considered as well.
But it all depends on how much you think you will spend to maintain what you consider an “upper middle class lifestyle”, and how accurate your estimate is. Current spending may be worth evaluating as a baseline, then adjusting for the factors mentioned above. Obviously, someone accustomed to spending $250,000 per year “needs” a lot more than someone accustomed to spending $25,000 per year.
And I assume if a person has some income to cover a portion of yearly expenses, then the 25 times figure would be 25 times the expenses not covered by yearly income.
@TatinG - try looking for online retirement calculators. Here is one example:
https://www.nerdwallet.com/investing/retirement-calculator
Make sure to fill out the optional part first and then put in the main numbers.
This is just one example. There are probably some that are much simpler and some that are more complex. Depending on how detailed the calculator is you can play around with many assumptions - age at which you will retire, how long you will live, inflation rate, anticipated return on your investments, how much you will withdraw per month and desired % increase in that amount over time, federal tax rate, etc. Of course, it is difficult to predict ALL of these, which is what makes it so daunting. We like to think our “pile” is large enough, but it’s really hard to know for sure!
But note that many calculators are based on your working income, rather than an estimate of spending/expenses.
I’ve mentioned it on the other thread before about Fidelity’s Retirement Calculator which is a decent tool. You can use it without being a customer.
https://www.fidelity.com/calculators-tools/retirement-planning-and-guidance
For any of these tools, if you want to base it on estimated spending/expenses in retirement instead of on your working income, just plug the numbers you want to use into the tool instead. Easy peasy.
It’s interesting playing around and adjusting inputs to see how these will factor into your retirement scenario.
I’m single and planning to retire early. The plan is $2.5 million, with no debt (house, student loans, etc will be paid off). I do plan to do some gigs, however, to have something to do, but I haven’t factored that in.
Vanguard has one as well.
Way , way, way back In the retirement thread, it was noted that most of these calculators used a rule of 3% . If you have a nest egg where you use 3% per year, statisticaly your earnings should hold out. Playing with it today, if I needed $135000 income I would need close to your number . Congratulations and enjoy.
The no debt piece is key. Amazing how far it goes without mortgage, car, etc. college payments.
There is so much to consider besides $$$ number. Throwing a number out doesn’t make any sense without context.
Not necessarily. Depends on the total assets and total spending. I have the cash in the bank to pay off the mortgage, but since its 3%, why? Ditto the new car I just purchased; loan <2%…I’m earning more than that in a MMF. While having no debt would give me psychic income, I can do better investing the portfolio. (Consider a mortgage as a negative bond and part of your equity/fixed Asset Allocation.) In other words, paying them off does not change net wealth.
Bingo.
^ Yes context is key. My point re debt wasn’t to not have any, but rather to add that wrinkle to the conversation. Essentially, if you owe less, you don’t need as much. Completely get the argument of the arbitrage experienced in investment gain outperforming loan cost.
As a financial advisor, I deal with all types. I can easily make a mathematical argument why you should never pay off (or even down) your mortgage. How you could grow a massive account that would dwarf your mortgage which means you could always stroke a check to knock that out (if you wanted to). I could also make the argument that consistently outperforming your mortgage cost on an after tax basis could require a certain risk tolerance to take on more chance than the stomach could take.
It’s not just about numbers. It is primarily about context. So many different ways to get there based on individual circumstances.
@bluebayou my husband makes the same argument you do re: investment gains outpacing mortgage cost.
@rickle1 I don’t like having a mortgage.
Our compromise is that he maintains enough life insurance to cover the mortgage.
actually, jasmom, I’m conflicted. I plan on cashing in a large NUA in Jan which could easily pay off the mortgage using LT tax rates. That would feel great (heart talking). Then I put on my Finance hat (left brain), and think, ‘huh? what a silly idea…’ Really makes no sense if we might move in say, 5 years. (at which point, it gets paid off anyway).
We have the continuing debate. Are we moving or not. That is a major factor in decisions. If moving don’t pay off. If not, pay off. FA can’t make that decision for you.
I can pay off my mortgage with my assets; but I am making more with those assets than my mortgage is costing me. I am net gaining my net worth.
When that is no longer the case, I’ll pay off the mortgage.
I’m not paying off my mortgage early. I’ve just tied my retirement to when my mortgage is paid off in due course. I don’t want to retire with any debt, which is just a personal choice.
We paid off our mortgage for the simple reason that it feels good to have no debt. Yes, we could make more money if we invested, blah blah blah. But we are making plenty of money on our other investments. At some point you say “I have enough money, now I also have peace of mind.” Makes no sense to some people, works for us.
^ and that’s exactly the point. To each their own. It’s not just about numbers. It’s about feeling good about things, having confidence, being comfortable. Strategies vary by individuals.
Sleeping well at night is invaluable. We all do things that can help with that or hinder it. For us, we wanted to be totally debt free (done with mortgage, kids’ ed expenses, etc) before H retired. We prepaid extra every month on the mortgage to do so.
Maybe we could’ve earned a ton more in the stock market if we hadn’t prepaid but bottom line, it helps us sleep well at night.
I can’t see how any “number” for retirement can logically be calculated without a good handle on probable expenses over the rest of the lives of the people to be covered.