From Marvin Schulz, staff writer, Palm Beach Research Group: I’ve never thought about traditional retirement. I’ve never wondered about how much money I need to retire.
Until recently…
I visited Colombia for 10 weeks. In Salento, a famous coffee town in the mountains, I met a retired German couple. At night, they sipped beers in front of their bulletproof military-truck-turned-camper overlooking the mountains.
Excessive, I thought, but I asked them about the vehicle anyway.
“Shipped it from Germany,” they said. “Worked on it for years.”
I got curious, and inquired about their travels.
“We aren’t traveling,” they laughed. “We live in South America for less than $2,000 per month. For the both of us, of course.”
Splendid retirement, I thought.
But I kept returning to one question: How much money do I need to retire?
I realized this depends on the retirement lifestyle I want.
Last year, I lived in a shed in the hills of Stanley, Virginia. I could see the Shenandoah River from my back window. I had books, Internet, and home-grown food.
This is my ideal retirement scenario. It’s cheap, self-sustained, and healthy.
What’s your ideal retirement lifestyle?
And how much money do you need to achieve it?
What’s Your Ideal Retirement Lifestyle?
Would you like to live in the mountains? Or own a surfer shack on the beach in Costa Rica? Or do you prefer staying close to your loved ones, owning a house somewhere they can visit?
With cheap travel costs and abundant information, opportunities are endless.
But no matter what you desire, it’s crucial to think about your ideal retirement lifestyle ahead of time. If you don’t take the time now, corporations, financial planners, and the government will shape your retirement for you.
Next, you need to figure out what Mark Ford calls your “Magic Number.” It’s the exact amount of money you will need to live your ideal retirement lifestyle.
How Much Money Do You Need to Retire?
Most people have never asked themselves this question. So it’s no surprise 75% of retirees haven’t saved enough money for their sunset years.
If you take 30 minutes now to calculate, you’ll be ahead of 99% of the people you meet on the street. The payoff will be huge in terms of future happiness.
You can access the complete essay on finding your “Magic Number” here.
Step 1: Calculate How Much Money Your Current Lifestyle Requires
Mark calls this your Lifestyle Burn Rate (LBR).
This is the amount of money needed each year to enjoy your lifestyle. It’s easy to figure out. Simply calculate how much money you’re currently spending each year.
Your LBR is critical. You need it to know how much money you need to retire.
Example:
Let’s say you currently spend $80,000 per year. That is your LBR.
Step 2: Adjust Your LBR to Account for Any Spending-Pattern Changes in Your Retirement Plan
Remember the ideal retirement lifestyle you dreamed up minutes ago? Now it’s time to decide how much money you will be spending to live this way.
This is called your Retirement Lifestyle Burn Rate (RLBR).
To calculate your RLBR, start with your current LBR, then add any “extras” you want to enjoy during retirement. Next, remove any expenses you won’t have in retirement.
Example:
Let’s build on the above example. You currently spend $80,000 per year, but you know your ideal retirement scenario will run you only $50,000. That’s your RLBR.
Step 3: Adjust Your RLBR to Account for Any Additional Sources of Income
Now, say you’ve decided to retire and run a ramshackle bar in Ecuador.
The next step is to take your RLBR and subtract from it any income you are confident you’ll receive during your retirement. This income could include Social Security, a company pension, or side-business earnings.
Slash that amount by 50% to be on the safe side. Now, deduct this number from your RLBR. The number you’re left with is your Net Retirement Lifestyle Burn Rate (NRLBR). This is the amount needed per year to live the retirement lifestyle you want.
Example:
Okay, so you’re comfortable with spending $50,000 annually during retirement. You expect to earn $20,000 per year running your bar. Now, to play it safe, cut that $20,000 in half. Deduct the remaining $10,000 from your initial $50,000. Your NRLBR is $40,000.
Step 4: Determine What Rate of Return You Expect to Get on Your Savings
Now, there is one last step before getting to your “Magic Number.”
It’s determining the rate of return you can expect to get on your retirement savings.
Let’s say your NRLBR is $40,000 per year. If your “Magic Number” is $800,000, that means you’re expecting to get only 5% on your money. ($800,000 generates $40,000 per year at 5%.)
Ten percent returns on your savings would cut your “Magic Number” down to $400,000. Get the idea?
PBRG subscribers can access our asset allocation model here to help with the calculation.
Step 5: Calculate Your “Magic Number”
Now you have what you need to figure out exactly how much money you need to retire.
Take your NRLBR and divide it by your expected rate of return from Step 4. Voila! The result is your “Magic Number”—the money you need to enjoy the retirement lifestyle you want.
Example:
Your NRLBR is $40,000. You expect to get an 8% return on your savings. Your “Magic Number” is $500,000. Once you hit it, you can retire.
For more details on the calculations, click here.
Congratulations. You just took a huge step to designing your future.
Now, you might wonder…
How much money do I need to retire in the mountains of Stanley, Virginia?
About $250,000. Time to get to work.
P.S. If you’re not sure which retirement lifestyle to choose, read this article. In it, I discuss lesser-known retirement options.