If it isn't already, .04/12 should be your favorite number in the world.
Why? This fraction (~0.00333) tells you the amount of money your assets will generate each month in retirement for you.
Say you have $50,000 saved up for retirement right now. Can you spend $50,000 every year in retirement? Of course not, you’ll have one year of fun and then have $0 left.
The right way to think about that $50,000 is that it will produce some amount of income for you throughout the year. A 4% return per year is a pretty safe assumption. So say your $50,000 grows over the course of 12 months at a 4% rate. As the year progresses, your money will grow to $52,000. Over the course of the year, you can spend $2,000, and after the year ends, you're back where you started.
Why? This fraction (~0.00333) tells you the amount of money your assets will generate each month in retirement for you.
Say you have $50,000 saved up for retirement right now. Can you spend $50,000 every year in retirement? Of course not, you’ll have one year of fun and then have $0 left.
The right way to think about that $50,000 is that it will produce some amount of income for you throughout the year. A 4% return per year is a pretty safe assumption. So say your $50,000 grows over the course of 12 months at a 4% rate. As the year progresses, your money will grow to $52,000. Over the course of the year, you can spend $2,000, and after the year ends, you're back where you started.
$50,000
*1.04
= $52,000
-$2,000 (spend per year)
=$50,000
*Repeat until death.
But $2,000 a year isn't much at all to live off -- it's only $167 dollars per month -- so you'll need more money.
How much more? That depends on your desired spending levels.
I think my wife and I could live pretty comfortably off $5,000 per month, so we'll need $5,000 / (.04/12) or $1.5 million for retirement. We've got a long way to go, but compounding is working in our favor so even though we may only have 10% of that amount saved up, we're actually more than 10% through our savings journey because of how the money we have will compound (non-linearly) through time.
$1.5 million
*1.04
= $1.56 million
- $60,000 (spend per year)
= $1.5 million
*Repeat until death.
So now we know how much our assets will give us in retirement (multiply our assets by .04/12), and if we want to figure out how much of an asset base we will need for a giving spending level, we can figure that out too (divide by .04/12).
Note: None of the above considers social security, pension payments, inheritance, or anything like that, and that’s a good thing. You don't want to rely on others to fund your life.
Questions? Send me an email.
= $52,000
-$2,000 (spend per year)
=$50,000
*Repeat until death.
But $2,000 a year isn't much at all to live off -- it's only $167 dollars per month -- so you'll need more money.
How much more? That depends on your desired spending levels.
I think my wife and I could live pretty comfortably off $5,000 per month, so we'll need $5,000 / (.04/12) or $1.5 million for retirement. We've got a long way to go, but compounding is working in our favor so even though we may only have 10% of that amount saved up, we're actually more than 10% through our savings journey because of how the money we have will compound (non-linearly) through time.
$1.5 million
*1.04
= $1.56 million
- $60,000 (spend per year)
= $1.5 million
*Repeat until death.
So now we know how much our assets will give us in retirement (multiply our assets by .04/12), and if we want to figure out how much of an asset base we will need for a giving spending level, we can figure that out too (divide by .04/12).
Note: None of the above considers social security, pension payments, inheritance, or anything like that, and that’s a good thing. You don't want to rely on others to fund your life.
Questions? Send me an email.