Here's all you need to know: your number.
Your retirement number is the dollar amount you need to save to comfortably retire at whatever level you decide.
Rethinking Your Number
Retirement savings shouldn't be thought of as a finite amount in your checking account that, once you turn 65, you start spending and pray you don't run out. Bad strategy, my friend.
Instead, your retirement plan should hinge on a finite amount invested that you can draw down from to cover living expenses without eating into the principal (emergency fund separate).
So, how do you know how much you'll need? Well, researchers figured this out years ago, and it's a useful guide in retirement planning.
The Bottom Line
All you need to know is that you can safely withdraw and spend 4% of your saved money every year, and if it's properly invested (like, in one or two index funds), you will never run out of money.
So to get your number, just take your annual retirement goal ("I need $100K a year to retire"), and multiply it by 25. That's your number.
So if you need $100K a year in retirement, 25 times that is $2,500,000. You can safely draw down 4% of $2,500,000—that's $100K a year—and not run out of money.
This is retirement planning 101.
The Reality Check
I know what you're thinking, especially those reading this who are near retirement age. How on earth will you save $2,500,000?
Well, the other half of retirement planning 101 is compound interest calculators that determine how much you need to save each month to get there.
There are tons of retirement calculators out there, but roughly, if the markets return 8% a year on average, and if you start at age 35 and want to retire at age 65, you would need to save (and invest) about $1,800 a month.
Phew, that's more digestible.
But you want to retire on $200K a year? Double it. $300K/year? You're looking at almost $6K a month invested starting in your mid-30s.
You can start earlier, retire later, project a greater return, etc. But the math for those of us living in LA with high living expenses is always rather bleak—unless you start as a teenager, you have to save a LOT.
And life happens - there will be years you won't be able to invest as much as others, and then are you behind?
The Housing Hack
Here's my better idea.
Invest in the markets, absolutely. But make sure you get a house. Buy as big a house as you can and let it appreciate. Sell it at 65.
If you buy a $2.5 mil house and it doesn't appreciate AT ALL, just the act of paying it down over 30 years gets you to $2.5 mil. Guaranteed.
And it happens without thinking. The buying is the hardest part. Then it's just waiting.
Most of our nation's wealth is in our homes already. The average American has $62,000 in savings, and $300K in home equity. That's FIVE TIMES the wealth from holding a house vs. socking away cash.
Honestly, in the personal finance world, there's not enough talk about the home as a retirement savings vehicle.
People talk about mortgage interest and maintenance and all the very real math that shows that houses are expensive to own, but they miss the fundamental reason why people have five times more wealth in their houses than in the markets: wealth through home ownership happens automatically.
A house is like a forced bank account. While cash can grow at 8% if invested in the stock market, a moderately appreciating house can do the same thing without requiring the discipline most people don't have (myself included, by the way). Saving sucks and is hard, which is why so few people do it.
Your House is Your Retirement
As I see it, retirement planning boils down to two paths:
- save aggressively in index funds; and/or:
- leverage real estate appreciation and paydown.
The former requires enormous discipline most people lack; the latter is something everyone already wants. You don't need to convince someone to buy a nice house—it's literally what we all want. Even people with a house want a bigger one.
But hardly anyone I know is actually saving enough for retirement. And that's a-okay if you have real estate equity.
Your “retirement number” is far more easily achieved by buying and living in a nice home in LA for a few decades than by trying to save cash month after month, year after year.
