Your "number"

This subject scares me more than anything else. I know, I know everyone has heard that the U.S. savings rates are close to zero and the amount we have saved for retirement, even those getting very close to that date, is much less than sufficient. So doesn't anyone really care? Why aren't we doing anything about it? Are we in denial? I think the problem is due to lack of real understanding of the significance. Most of us do not know what our "number" is? What do I mean by "number"? The "number" is what we need financially to be able to retire. Yes, everyone's number is different depending on how they plan to journey through retirement, sit on the porch and watch the cows or travel the world and live large.

For the sake of simplicity and in the effort for people to begin to really look at what they need for retirement I will provide you with simple math to determine what your "number" is to be able to retire. Here we go.

How much money do you need to live on this year? (Example: $75,000)
Take that number and multiply by 25. (Example: $75,000 * 25 = $1,875,000)
That number is what you need to retire today. (see below for a rational for this calculation)
To figure out how close you are to your number now take the current value of all your assets (not including your house since you have to live somewhere) and subtract all your debts to find your net worth.

Yes, that's a big number if you haven't started to save. In fact considering that we don't know what potential life risks can come to us in the future, I think this number is conservative. And you can't easily take that money out of your home if you have any equity because you do need to live somewhere.

The best course of action is to save regularly and invest prudently. I know that is easier said than done. That is the subject of a future blog.

(How the “number” is calculated? Based on research studies, it is a commonly accepted rule that you have a high probability of not running out of money for the rest of your life if you spend no more than 4% of your total net worth. That assumes you don’t live excessively and you make prudent investment decisions. The number “25” comes from dividing 100% by 4%. This number is in turn used to multiply by your total annual need to get the total amount required to retire. Yes, taxes are an issue and this number will change over the years based on your lifestyle and changes in inflation but this number is a good start. I just want to get people to realize the significant sums of money that are needed to retire. To figure out your specific number consult with your financial advisor)