What does retirement look like to you? How would you go about defining it for yourself and make it achievable?
Some people say, “I want to go fishing.” You can do that now. Others say, “I want to travel.” You can also do that now. At some point you are not going to want to work or will not be physically or mentally able to do so.
People work for 40 – 50 years with the goal to do what? Retire of course but what does that really mean? If you look at it abstractly, everyone’s goal is the same. They want to retire, however, when you put it into the context of money, everyone’s definition is different. Why? Everyone has different goals in retirement.
The first concept I want to talk about is called the Financial Independence Number or FIN. This is the exact dollar amount someone needs to save to be able to retire the way THEY want to. Not someone else’s idea but their own.
So how does someone calculate this?
Look at what you are making now on a yearly basis. Would you be satisfied to pay yourself that amount in retirement? How about 80% of what you are making? Multiply what you would like to make a year in retirement by 25 (life expectancy in retirement, assuming retiring at 65). That will give you a rough estimate of your FIN.
Let’s say you want to live off of $50k/yr in retirement. $50k x 25 years = $1,250,000.
So does that make my FIN $1,250,000? No it does not. This is a rough estimate of where you need to be.
The second concept is called the Monte Carlo scenario. This scenario was used to look at how much someone could spend in retirement and not run out of money. The analysis stated, if you only spend 3% of your money in retirement, you have a 97% probability you wont run out of money. 3% of $1,250,000 = $37,500, not $50k.
Dividing your yearly salary goal by the Monte Carlo scenario %, can give you a better estimation of your FIN.
$50k / 3% = $1,666,666, lets say $1.7M. Now that you have your destination, the next question is: what does it take to save $1.7M?
Wow!! There is a $1280 difference between starting at age 20 compared to age 40. That is someone’s house payment. The point is, the earlier you start the better, however, it is never too late to start.
Written By:
Dan Kirtz, Maintenance and Operations Assistant