What Do I Need to Retire?

August 10, 2007 by Marcel

It’s amazing how much my attitude toward pretty much everything has changed in the last five or so years. Five years ago I didn’t want any children at all. I now have two. Five years ago I wanted to be a consultant that traveled forty weeks a year, so I could see all the great cities in the U.S. Today, it’s difficult to pack up for a week of business travel without my wife and kids. Five years ago I spent money on everything I wanted and saved anything that was left over (if there was anything). Today, I save according to goals I set and spend whatever is left over.

That last point is a fundamental difference in mindset between people who end up living comfortably in retirement, and those who struggle with debt their entire life and into retirement (if they CAN retire). Those that spend first and save later feel the need for immediate gratification and think that they will someday get around to saving for retirement. Those that save first and spend later understand that living moderately, but comfortably, now is crucial to living comfortably in their later years.

To make it worse, it isn’t easy switching from a “spend first” type of person into a “save first” type of person. You have to give up many of the things you take for granted like brand new cars, I-Phones, plasma televisions, and other luxury items. You may have to bring your lunch to work four days a week and buy a $300,000 house instead of stretching for a $400,000 house. It certainly wasn’t easy when I made the change, but I started to set goals and cut back where needed in order to reach them.

Since my retirement goals require by far my largest contributions, I’ll share my goal setting process for that portion of my financial plan. Here’s what I did:

First, I decided how much income I wanted annually in retirement (in today’s dollars)

For the purpose of this article, I will assume this number is $50,000. Remember, if you plan well, you won’t need your full income at retirement. Experts estimate that you will need approximately 70-80% of your income for retirement.

Next, I estimated how much of a nest egg I needed to produced that income

A decent, but not perfectly accurate, rule of thumb is to multiply your desired income by 20 to 25. So, for our example, we would need $1 million to $1.25 million when we retire. It may seem like an overshoot to save this much money in order to produce only $50,000 a year, but remember, in retirement your money will likely be generating smaller returns of 4 to 5% because of a safer asset allocation.

Now that I have my desired nest egg, I need to figure out how to get there

These calculations are a bit more involved because of all the tax consequences for various types of investments. To figure this out for your situation, take a look at these retirement calculators at Fool.com. For this example, I will assume I am investing in a 401(k) or other tax-deferred retirement account. Assuming thirty years until retirement, an 8% annual return, and 3% inflation, it appears I would need to save approximately $20,000 to $25,000 per year to reach my goal. Hopefully there is a company match!

Now that I know how much I need to save, I have to cut costs to free that money up

For this, I will refer you to some great posts from around the personal finance blogging world:

Whatever your goals, start earlier rather than later. Take advantage of the wonders of compound interest!

13 Comments

Graham Lutz, The Young Capitalist said

am August 10 2007 @ 7:59 am

It may be that I grew up in and entrepreneurial family, but I have a hard time subscribing to the work hard, save, invest, and hopefulle retire when you’re 65 routine. I’m focused right now on building assets that create cashflow. Then, I may not have millions in cash reserves, but I do have the same cash flow, which is the ultimate goal in my book!

I think I’m in the minority though so keep doing what you’re doing. Financial responsibility is something our society is sorely lacking! Good work!

Graham
Brian said

am August 10 2007 @ 9:52 am

Great point, Graham. I also am developing assets that will support me once they develop a sufficient cash flow.

However, the focus of most personal finance sites, mine included, focus on the majority of people that will never develop enough assets early enough to live off them. The vast majority of people will work for 40+ years until (hopefully) they can retire.

By the way, I enjoyed your post “Why I Talk to Everyone.” It’s amazing where you will find your next great idea.
Millionaire Mommy Next Door said

am August 15 2007 @ 8:09 am

What happened in your life (during the last 5 years) to change your way of thinking? Was it simply a result of maturity or a specific life event? Just curious! You’re one of the “lucky” ones– I watched my mom postpone thoughts and planning for her own retirement until it was literally too late…
Brian said

am August 15 2007 @ 8:36 am

Millionaire Mommy Next Door – Simple answer. I met my wife and she told me what to do! Just kidding…

I think it was a combination of becoming more mature and just realizing how much fulfillment comes from family life. I still want to travel and splurge from time to time, but within the context of what and when is best for my family. You never think it’ll happen, but change is inevitable!
The Friday Gathering for 8/17/2007 | Gather Little By Little said

am August 17 2007 @ 8:16 am

[...] Dominance asks the question What Do I Need to Retire? and he tells us how to dramatically cut our cooling costs. Couple Brian’s tips with my tips [...]
limeade said

am August 18 2007 @ 1:13 am

I’m also focusing more on creating multiple income streams. I plan on doing this mostly through real estate and hopefully other business ventures. My goals in life don’t include working for 40+ years.
Moolanomy weekly roundup #4: said

am August 19 2007 @ 9:01 am

[...] Dominance wrote What Do I Need to Retire? and share with us things that differentiate people who end up living comfortably in retirement, and [...]
The Simple Dollar » Carnival of Personal Finance #114 said

am August 20 2007 @ 7:37 am

[...] What Do I Need To Retire? (@ financial dominance) [...]
Carnivals - Week of 8/20/07 - FinancialDominance.com said

am August 23 2007 @ 9:46 pm

[...] contribution to both carnivals was What Do I Need to Retire.Share [...]
Weekly Highlights - August 24, 2007 - FinancialDominance.com said

am August 24 2007 @ 10:40 pm

[...] My most popular post this week was What Do I Need to Retire? [...]
Free Estimated Tax Return said

am February 19 2008 @ 2:57 pm

Reverse Mortgages ? A Tax Free Income For Senior Citizens…

I fully realize if it sounds too good to be true, it probably is and There Ain’t No Such Thing As A Free Lunch (TANSTAAFL) immediately jumped into your head when you read the title of this article. However, if you are 62 or over, you may have just fou…
Because I had so much fun participating in last week’s carnival… | beingfrugal.net said

am March 9 2008 @ 1:48 pm

[...] also liked What do I need to Retire? at Financial Dominance, It’s Not All About Money at The Baglady (love the name of that blog), [...]
Brad said

am November 27 2008 @ 9:18 am

reat point, Graham. I also am developing assets that will support me once they develop a sufficient cash flow.

However, the focus of most personal finance sites, mine included, focus on the majority of people that will never develop enough assets early enough to live off them. The vast majority of people will work for 40+ years until (hopefully) they can retire.

By the way, I enjoyed your post “Why I Talk to Everyone.” It’s amazing where you will find your next great idea.