What’s Your Magic Number?

By “magic number,” I mean how much money will you need in order to retire comfortably?  Without giving away too much, let me answer briefly.  A WHOLE LOT!!!! Of course, it’s going to be a different number for each of us and there are countless ways to arrive at a number that makes sense for your life  so my goal here is to try to help you figure out a reasonable estimate of what you might need without having to run numbers on a spreadsheet or a website that may or may not be worth the time it takes to prepare the estimate.  I’m not saying it’s going to be super-easy but at least it won’t require much math!

I’ll start with the hardest part. This part is where the real work will happen.  If you can answer this question with some degree of certainty, you’re in great shape and the rest will be easy. If you can’t, then you will need to dig into your financial life and be able to answer it. This is the key to figuring out how much money you need in retirement. How much money do you spend in an average month or year?

Human behavior is interesting. We are creatures of habit and your spending habits during your career probably won’t change significantly during retirement. What I have seen happen with retirees that I know is that there is a period (6 months – 2 years) where you spend a bit more than you did while working because you have free time and that time gets filled with “stuff” and each thing you do has an associated cost.

Then there is the “Oh my goodness!” phase where you realize how much you have been spending and worry about running out of money so there is a clampdown on spending.  That doesn’t last long until you realize “this isn’t fun” and that’s when you reach your equilibrium point. But that equilibrium will probably look a lot like your spending today so get a really good handle on today’s level of spending.

Use the real numbers, not what you’d like it to be in a perfect world.  Newsflash: this isn’t a perfect world and emergencies and unexpected things happen. For a quick look at this, check your bank statements for the last 3-6 months. On the first page, there is usually a total outflow number. Add up the last 6 months of outflow, divide by 6 and you’ve got your real level of monthly spending today.

So let’s use a hypothetical figure of $3,500/month over the last 6 months to complete the example here so you can figure out your “magic number.”  From that figure of $3,500, we need to look at your monthly incomes during retirement. This is ONLY for incomes that you know will hit your bank account on the first of each month like pensions and Social Security. Make sure you KNOW your numbers for your pension (talk to your HR rep or run an estimate online) and Social Security (www.ssa.gov).

For purposes of this example, we will assume that pension and Social Security income add up to $1,500/month.  That leaves a $2,000 gap between income and expenses. That’s where your asset base comes into play and that’s how you’ll fund that monthly shortfall. You will need roughly $250,000 for each $1,000/month gap that you are trying to close. So in the example of a $2,000/month gap, you’d need about $500,000 in liquid investments to cover the gap.

What we haven’t factored in yet is the cost of healthcare expenses. Fidelity produces a report annually and over the last 5 years, it has been around $225,000 in out-of-pocket expenses for a 65-yr old couple without retiree health insurance. So you would add your $500,000 spending gap to the $225,000 healthcare account for a total of $725,000.  That’s your magic number if your numbers look like the ones in the example.

Your job now:

  1. Determine how much you spend on an average month.
  2. Run a Social Security estimate.
  3. Run a pension estimate (if you have a pension).
  4. Using the $250k per $1,000/month spending, determine your investment asset need.
  5. Add $225k.
  6. Relax, have fun and get busy getting to your magic number!
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