Retiring: Whats your magic number?
We don’t invest only to make money. We invest to accomplish goals. Goals such as retirement, paying for college, leaving your children at least $1million, leaving a bequest to charity. Specific, easy to measure goals.
People often think there is a certain amount of money that a 40, 50, or 60 year old should have set aside in order to retire. How much?
It’s an interesting question. The answer, much like everything that has to do with investing, will be different for everyone. Mostly it will depend on your lifestyle and your spending habits.
We typically find that the answer to this question is determined by working backwards. Start by determining your NEEDS. What is the bare minimum of income you absolutely need every month to get by? Hopefully you have a written budget by now; if not add up your mortgage, health insurance, utilities, etc- all of the necessities of life. Think about your annual expenses, long term care premium, real estate taxes. Figure out exactly what you need on an annual basis, and find a way to generate that from your investments using fixed income investments. If you can achieve this using guaranteed investments, that will be your best place to start.
Once you have satisfied your needs, then you should think about your WANTS. Things like vacations, hobbies, and luxury purchases. You can figure this number into the equation.
If possible, you should account for the UNKNOWN, such as accidents or inflation. Living on a fixed income is a beautiful thing, until unexpected expenses, like a new roof, force you to dip into principle. If you have less principle, you will earn less interest and hence, you will have less income. Also, be sure to consider the eroding effect that inflation can have on your income.
Another good rule of thumb is to keep 3 months of needs in a emergency fund of cash, no matter what stage of life you are in.
Priority #1 is to make sure you can satisfy your needs. Otherwise you’ll be back to work in no time.
