If you don’t know where you are going, any road will get you there. ~ Lewis Carroll
According to the 2011 Retirement Confidence Survey, fewer than half of U.S. workers have tried to calculate how much money they’ll need to retire.
Un . . . ac . . . cept . . . a . . . ble.
How do you achieve a goal when you don’t even know what that goal is?
Recently, Romeo Clayton, author of How We Prevent Wealth, created the Wealth Number Challenge. It’s a call for savers to figure out the value of assets required to support their lifestyle in retirement. When you exit the workforce for the last time, you’re gonna want to have more than just contempt for loud music. You’ll want access to cash–loads of it.
Whether you truly love what you do for a living or despise every nanosecond of it, you should have an idea of what you’ll need socked away when you reach the end of your career.
Join me in the Wealth Number Challenge.
Plan A - Completely Retire at 65 Years Old
Before I run through the details, I aim for retirement savings of about 15% ($11,300) of a $75,000 annual income. But practicality has to guide the process of finding my Wealth Number.
So? What to do?
Create a written, monthly budget, that’s what.
It’s the only way to get a clear view on whether I can even afford to contribute 15% toward retirement each year.
No one can predict with absolute certainty what’ll happen within the next 30 minutes, let alone 30 years. If you plan on working for the next few decades, get ready to start guessing.
That’s where the assumptions come in. I knoooow, it’s frustrating that such an important number is based off of events you can’t control. Get over it. Do the best you can with the information you got. You can always update the calculation once you’re privy to better data.
- Annual Income: $75,000
- Risk Tolerance: Moderate—Average Return (1970 – 2011) 9.6%
- Social Security: $0
- Yearly Solo 401(k) Contributions: $11,300 (Approximately 15% of income income)
- Retirement Income: $157K ( 100% of $75K Adjusted for inflation)
- Retirement Age: 65
- Life Expectancy: 90
- Annual Inflation Rate: 2.2%
- Social Security Benefits: $0
- Wealth Number: $4,015,900
- Amount Saved: $1,792,400
- Shortfall/(Surplus): $2,223,500
Yeah, so, uh, looks like I gotta do something to close the $2.2 million gap between what I’ll need and what I’ll have under Plan A. I can still retire at 65 while earning $75,000 a year IF I increase my yearly retirement contributions to $28,500. Let’s see how I’ll make it happen.
- Eliminate entertainment budget
- Dine out only once or twice a month
- Refrain from having children
- Trade iPhone for flip phone, give up data plan, switch to wireless provider Boost Mobile or Cricket
- Forgo all travel
- Consolidate shopping trips
- Cancel gym membership
I’ll give up travel, my gym membership, and even children, but cancel my data plan . . . ?
A girl has got to draw the line somewhere.
Plan B – Turn 65 Years Old, Then Work for Another Decade
Same as in Plan A except I don’t retire until I’m a grizzly, 75 years old.
- Wealth Number: $3,220,800
- Amount Saved: $3,272,100
- Shortfall/(Surplus): ($51,300)
Although I enjoy what I’m doing now, I at least want the option of retiring at 65. I’ll look for another alternative.
Plan C – Snap My Fingers, Earn More Money, and Fully Retire at 65 Years Old
Same as in Plan A except my annual income is $100,000, and I put away $28,500 per year for retirement.
- Wealth Number: $4,015,900
- Amount Saved: $4,022,800
- Shortfall/(Surplus): ($6,900)
Of the three, Plan C is the most desirable. Who wouldn’t want to make more money? However, I acknowledge that extra income requires extra effort on my part.
Other Items of Note
1. Don’t let the enormity of your Wealth Number prevent you from saving what you can. Remember, it’s okay to reach for the middle.
2. Although my calculations assume I won’t receive any Social Security benefits, I’ll likely receive something–even if it’s less than 100% of current estimates.
3. According to the SSA’s Actuarial Life Table, I’ll be good and dead before reaching 82 years of age–and I’m black too. Child, please. My Wealth Number is based off of a life expectancy of 90 years.
4. I used the Charles Schwab Retirement Savings Calculator to arrive at my Wealth Number. Additionally, I used the salary calculator at PaycheckCity to estimate my take-home pay under each plan. Ideally, you’d work with a competent financial advisor to help you come up with how much money you’ll need to retire.
Will you take the Wealth Number Challenge?