There are many formulas for figuring out how much money you need to retire. Almost all of them can end up being wrong for a variety of reasons.
Let’s face it: We love fast food, and we love “fast-food” formulas — simplistic rules of thumb that we can use instead of actually thinking about a problem in depth. The retirement investing space is filled with these. Some say you need eight-to-12 times your current annual income or that you should have 25 times your annual expenses, 80% of your income at the time of retirement or — and this is a good round number — $1 million.
While thinking seriously about retirement finances is useful, for most people, these formulas aren’t going to come close to what your retirement actually looks like.
To truly get comfortable with your retirement plan, the first thing you need to do is actually plan your retirement. How long are you likely going to live based on averages, genetics and behavior? What will be meaningful and enjoyable to you after you finish working full time? Do you plan to travel or pursue a hobby? Where do you want to live? And what’s your style — hanging out at a pricey country club restaurant every night, or cooking for yourself and staying in? Do you expect to go shopping at trendy boutiques weekly, or are you more of a “I bought these pants at the Gap five years ago, and they still look good” person?
In short, it’s your lifestyle and your length of life that will drive your financial needs once you’re no longer working. To gauge your needs, try this exercise. Carve out a couple of hours of quiet time. Turn off your phone, close your email and tell your family members to leave you alone. Better yet, maybe you and your significant other can take a long weekend in a place that’s comfortable, but not so fascinating as to be distracting, and do this together.
Think really hard about what “retirement” means to you. At a younger age, “not having to go to work” seems like what retirement is — and should be — all about. But if your mentality never evolves beyond that, then you can’t take full advantage of new opportunities. Instead, think about your bucket list — places you want to go as well as experiences you want to have.
Think about how you want to live your life and where. Living in a dense urban area affords you easy access to cultural amenities like concerts, festivals, museums and more. However, it may be more crowded than living in a suburb, exurb or rural area. If you do live in the city, you probably won’t need to drive a lot, and you may not even need a car at all with easy access to public transportation. Have you considered moving to another part of the country? Or even another country altogether? Tens of thousands of people do. Some hate it and come back, but many find it’s an adventure that keeps them engaged.
List things that would be meaningful to you. They may be volunteering for a charitable organization, mentoring others, or painting, gardening, beekeeping, birding or learning to play the zither.
Now your future is starting to come into focus. Extend the exercise by imagining what an average retirement day is going to be like: Where will you be? And with whom? Doing what?
How Much is Enough?
Once you have a fix on your future — the where, the how, the what and with whom — it’s much easier to put actual numbers on that lifestyle. Multiply that need by the number of years you expect to live — taking into account slowing activity as you get older — and you’ll come to a much closer estimate than any formula can provide. Throw in a little extra for increasing lifespans. Want to feel optimistic? Here’s what the Social Security Administration’s actuarial scientists say: “That mortality rates are found to continue to decline, at every age for which adequate data are available, demonstrates that no absolute limit to the biological life span for humans has yet been reached, and that such a limit is unlikely to exist.”
Write a brief overview of your conclusions and then schedule a conference with your financial advisor. With a clear picture of where you want to go, he or she will be able to help you build a solid map of how to get there.
Be optimistic: Retirement really can be some of the best years of your life.