(Funny story — I couldn’t find my copy of the book so I bought a new one from Amazon, started taking notes in it, and then discovered my old copy. So I may be doing a giveaway someday of a slightly used version.) 🙂
Anyway, I thought I’d share some principles from the book with you over the course of a few posts.
That said, buying a copy for yourself is a great investment in your retirement planning.
Early on in the book Tresidder lists the four steps you need to take to determine your retirement number as follows:
- Figure out how much income you need in retirement based on your estimated spending.
- Subtract how much income you’ll get from pensions, Social Security, and other investments to determine your income shortfall.
- To cover that shortfall, figure how much you can safely withdraw from savings accounts without being at risk of outliving your money.
- This withdrawal rate and income requirement mathematically determines how much money you need to save to retire so you don’t run out of money before you run out of life.
This all seems very straight-forward until the author then lists seven questions which are impossible to answer (like “What year will both you and your spouse die?”) that he says have to be answered for the four steps above to work. The author then spends the next several chapters giving advice on how to account for these seemingly unanswerable questions.
My Take on the Four Steps
The above is not an impossible task by any means. It’s basically what I did in A Different Retirement Plan.
With that in mind, here are my thoughts on the steps above and how to get close to an accurate retirement number:
- I agree that you should start with your estimated spending. I would recommend putting together a specific budget rather than just taking a percentage (like 80%) of your current income or spending (which many “experts” advise). You have to know as close as possible to what you’ll spend so you will know your annual income requirements. Making a detailed budget is the best way to be as accurate as possible.
- From the spending number, subtract your various sources of income. If you retire early, there will be no pension, IRA/401k, or Social Security income — you’ll just have to make it on the ability of your investments to generate income. For me, those are rental real estate and P2P lending.
- Unless your investments generate a boatload of income, you’ll likely have a shortfall. You’ll need to cover your shortfall from new sources of income (like a part-time job) or from withdrawals from your savings. Hopefully you either have a very large amount of savings or very small amount of shortfall (or both).
- Divide the amount of your savings by the annual shortfall and you’ll get the number of years your savings will last until it is depleted (or at least a close estimate of it — your savings can grow before you spend it all so it will likely last a bit longer than this).
- If you have an especially high number (mine was 180 years or so last time I ran it), you can feel free to retire safely. You have more than enough margin for error, inflation, large mishaps, and other dangers that might derail your plans.
- If you have an especially low number (like 10 when you are 50 years old), then unless you’re planning on dying before you get to 60, you don’t have enough.
- There is a middle-of-the road number that isn’t enough in and of itself, but allows you to safely reach Social Security, pensions, 401ks/IRAs, etc. which then get you over the hump. For example, if you are 50 and have 20 years of funds to cover retirement expenses, but you then have $500,000 available at 59 1/2 from an IRA and Social Security at age 67, then you’ll likely be able to make it (you should run the numbers to be sure).
This seems like an easy way to get a solid retirement number with a fair bit of accuracy.
Anyone think I missed anything or have any comments to make this analysis better?