The Retirement Number You Should Fixate On
Retirement is not only a life altering event, but it comes with high stakes. None of us want to cut the cord too early to later discover that we have to return to a less-than-ideal work environment in our golden years. So naturally there is a ton of discussion about the intricate details of accumulating wealth in your working years to sustain you over a few decades’ worth of retirement.
Saving and planning for retirement is a game of numbers. Here are just a few of the numbers (and rules of thumb) you need to consider…
The bucket: How much money to have saved by your first day of retirement?
Return: The expected return of your current and future investments.
Savings rate: Save 10-15% of your income.
Benchmarks: Have 1x income saved by age 30, 3x income at age 40, 6x income at age 50 (Fidelity.com).
Ages: 59 ½ (the early withdrawal penalty is lifted), 62/~67/70 (important Social Security ages), 65 (Medicare)….and thanks to medical advances, some of us are expected to live into triple digits.
Expenses: Advisor fees, expense ratios.
Withdrawal rate: 4% safe withdrawal rate.
Contribution limits: Annual limits for each retirement account.
Matching: % of employer match, both now and in the future.
Income requirement: How much you need annually in retirement
Salary: Current and future.
Years: # of working years vs. # of years in retirement.
Inflation: Purchasing power of money.
Allocation: Percentage of equities to fixed income.
Tax rates: Decide whether to save pre- or post-tax or both; will rates go up or down in the next few decades?
Which number should you focus on?
Hint: it’s not listed above. I’d argue that your primary focus should be your current budget. Control the controllables. Pay attention to where your money is going now, and you will build a lifelong habit of controlled spending. Even if you don’t have your budget detailed down to the dollar, there’s a huge benefit to being aware of the dollars moving in and out of your hands each month.
It’s not difficult to find the right vehicles to invest in, and reasonable ways to accumulate wealth. What’s challenging is realizing and internalizing this fact: you can’t outearn bad spending. Very similar to the motto “you can’t out train a bad diet”. Build this budgeting muscle now – you will find it strengthens over time and allows you to prepare for life’s curve balls.
Learn to live on less than you make and invest the difference. Retirement funding will follow if you can control your spending impulses. Avoid seeking the next best thing. If the bankrupt athletes and celebrities have taught us anything, there is always something more to be desired, regardless of your income.