Well, I finally took the time to set my retirement number as I've been planning to all year. And let me tell you -- it's big. REAL BIG!
Luckily, I have a good headstart since I've been maxing out my 401k for years and I have lots of time left to save (over 20 years). I have time to let the power of time and the power of compounding work for me. Still, I have a long way to go. It's unbelievable how much you have to save to fund retirement these days.
When I set the number, I made some very conservative assumptions that made my retirement number higher including:
- I assumed no retirement support from Social Security.
- I retired at 65 (though I'd like to work longer).
- I set the return on my savings at only 6% -- an amount I think I can beat.
From there, I used five different methods to set my retirement number -- two I created myself and three I found on the web. Then I took an average of these five (and they did vary by a decent amount) and set that as my retirement number.
I suggest you do the same -- come up with a concrete number that you need for retirement -- and then start saving for it. Otherwise, how will you know what you need and what you should save to get there?
If you want some thoughts on retirement, check out these posts from Free Money Finance:
Now -- I need to set a college number for my kids!!!!!!!
If you don't mind sharing, I'd like a little more information as to the five methods that you used in calculating the retirement number. I'm particularly interested in the two methods of calculation that you devised yourself.
Posted by: GHoosdum | August 21, 2006 at 03:03 PM
Ooooooooooooh -- I feel a "part 2" coming up. ;-)
I'll work on trying to describe the two ways I set my number in a short post. It won't be this week, but stay tuned.
Posted by: FMF | August 21, 2006 at 03:27 PM
I just want to know what your resulting number is. Don't leave me hanging! :> Yours may be BIG, but I bet mine is BIGGER (I'm younger than you so I'll be dealing with more inflation in total)...
Posted by: Flexo | August 21, 2006 at 03:33 PM
Ha! You wish!!!! ;-)
Posted by: FMF | August 21, 2006 at 03:36 PM
The difficult part is probably estimating what your expenses after retirement are. If you don't wish to disclose your number, just disclose the number of years of income. The safe spending rate of a diversified portfolio would suggest 25 years of income, but if you own your home, are debt free, no longer need to save or spend on work, pay less taxes, this can be trimmed substantially. It is always best to work in current dollars and real rates of return to provide a realistic feeling of what is involved.
Posted by: Lord | August 21, 2006 at 05:13 PM
In another financial resource I follow I have read a number of times about 'consumption soothing' and in particular the ESI Planner (http://www.esplanner.com/ and I am in no way affliated with it ;-) ). I've never used it and wonder if you or anyone else has before I look to buy a copy. It in theory should be a very helpful in answering the 'how much' question, thoughts?
Posted by: Stephen | August 21, 2006 at 08:35 PM