At some point, everyone feels that they need to know their “NUMBER.”
Generally, someone’s ”Number” is the amount of money necessary to quit working. Some experts say that this number equals annual income multiplied by the number twenty-five. (For example, a person with an annual income of $100,000 per year would have a “Number” that would equal $2.5 million.)
Other experts say in the current economic environment that the multiplier should be 33 instead of 25. (This means that in our example the “Number” now becomes $3.3 million.)
More than half (56%) of Americans don’t know how much they’ll need to retire comfortably. More than one in five (22%) Americans have less than $5,000 saved for retirement, and 15% have no retirement savings at all. It seems like $2.5 million to $3.3 million dollars is a pretty hefty amount to save before retirement (especially for someone with very little or no savings.)
So, what exactly does a person’s “Number” represent?
Technically, it is the amount of saved and invested money that will be needed for a person to quit working. Realistically it is a combination of net worth, age, and lifestyle. Functionally it represents how a person will live (lifestyle), how much he or she will spend (net worth dependent), and how much time they will be spending (age dependent) in retirement.
It’s obvious that an 85 year-old who no longer travels, and lives in a small patio home would have a much lower annual spending amount than a 40 year old who lives in a larger home, travels, and has many hobbies. (So, by default the 40 year-old will have to have a much larger ”Number” because his annual expenses are higher, his living expenses are higher, and his age dictates that he will normally be around for a longer time frame than the 85 year-old.)
So, without too much consideration one begins to understand that the concept of a ”Number” will vary greatly from person to person based on lifestyle, net worth, and age.
It is also interesting to observe that even when people state that they have reached their personal “Number” they continue to work, sometimes for many additional years. (I’ve spoken briefly about the O.M.Y. (One More Year) syndrome in my post titled: DECIDING TO RETIRE- PARALYSIS BY ANALYSIS
Common sense would indicate that the “Number” itself is not truly relevant if it is not the true deciding factor for discontinuing paid employment. Many people don’t even know how to begin to determine their personal “Number.”
Instead of working towards a “Number,” which is irrelevant as stand-alone information, we will begin to gather the information that will be used in concert to create an understanding of each person’s unique net worth, spending, and age. When used in concert, this information becomes the basis for decisions affecting retirement planning.
Where exactly will we go from here?
In the next few blogs, we will work towards formulating a Net Worth Statement, a Spending Profile, and a Basic Drawdown Percentage when retired.
“ENOUGH” will be different for every person, but the basic information is still required and necessary to begin formulating a retirement plan. (These statements and profiles will require some effort on your part.
But, don’t let the reports and information gathering prevent you from taking this necessary step forward.)
As previously stated, at RETIRING WITH ENOUGH I will always try to simplify the process.
My next post will address the process of formulating a Net Worth Statement. This is regarded as the most important single piece of information used in the retirement planning process. Once the Net Worth Statement is generated, it is normally relatively easy to modify the information as time progresses.
The hard part is the initial information gathering and collation needed to formulate an initial Net Worth Statement, and the time required to identify and list necessary assets and debts.
My next post on RETIRING WITH ENOUGH will provide more information and guidance on the Net Worth Statement.
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