The best book I’ve ever read on retirement BY FAR is Todd Tresidder’s How Much Money Do I Need to Retire?
(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?
Jon @ Be Net Worthy says
This seems like a pretty straightforward and reasonable approach. My only add is that you could look into longevity insurance which addresses the issues raised by the author of not knowing how long you will live. It kicks in if you live to a certain age, e.g. 85 or 90. Then you at least have an endpoint to plan all of your spending against. If you live “too long”, then the insurance kicks in.
This is a nice write-up of the issues involved and how to assess that awkward gap between early retirement and waiting to be able to draw on your pension or social security!
I really enjoyed your post. It was aimed at the upper middle class family.
My favorite retirement book is Die Broke by Stephen M. Polland. He has a 4 part plan 1) Quit today. Look at your job concering the money you make —the bottom line. Focus on what makes value for you not just for the company. 2) Pay cash. Try not to go into debt to pay for items except maybe your house or car 3) Don’t retire. Try to continue to be productive and generate income 4) Die Broke. You should invest but don’t worry about passing on a big estate.
I Googled to find the following figures. In the United States the median income is $50,502 (before taxes), the median house $188,900 and th median amount of children 2-3 (2.5) . The average cost of a new car is $33, 506 and the cost of college is $32,405/year for a private school and $9,410/year for a public school. If you work an average job and have a spouse, buy a house ,one car and send 3 children to college, it will take a lot of money. That’s not counting the occasional vacation, weddings and holiday gifts. Most people are average. Everyone is not going to be a doctor, lawyer or enterpreneur. Where is the money coming from to purchase this lifestyle? The average 55 to 64 year old has $104,000 in retirement . Who can really retire?
The best you can do is not be a financial burden to your children in your old age. How can you afford to not to be burden?
One other thought is that you can in some 401k plans (including mine) take withdrawals if you retire at 55 from the company holding the plan. That can help bridge the years until IRAs at 59 1/2 or Social Security later.
Mike H says
It’s a good strategy. For me, I look to have all sources of passive income to be 150% -200% of my spend rate prior to retirement. That way principal is not drawn down and there is a healthy margin over expenses so I can continue to reinvest while in retirement. This is an overly conservative strategy but helps me sleep well at night. As I have approximately 100% coverage of expenses by passive income it shouldn’t take more than another decade or so to get to this point.
Do you have a formula for reducing a non COLA’d pension? Meaning we want to live on
$80k total so take away
$20k in SS less
$?? In non COLA pension valued at $30k/yr in actual dollars
I know you can’t count the full $30k amount but how much do you count?