How do you predict what you will need in your golden years? Saving for retirement can be confusing. Many Americans believe $1.27 million is enough, others say more is needed. What is THE NUMBER that will ensure you don't outlive your money? Don't worry, in this piece I'll break down the numbers and provide you with a conservative estimate for a comfortable retirement.
Before we get to our conservative retirement savings goal, we have to start from the expenses we want to plan for in retirement. Let's start from the basic necessities:
Shelter
Everyone needs a place to live right? As you save for your retirement the first thing you'll want to plan for is where you will be living. There are a lot of options for retirees: they can stay in their family home, downsize to an apartment in the city, or move into their older children's guest house. For this calculation, I'll conservatively assume that you want to live in a nicer house at the upper end of the potential range. To be realistic, we will use a property like Antilia in Mubai, India as a conservative benchmark for your potential retirement sanctuary. After all, nothing says golden years like using a golden toilet daily. Properties like these will typically run in the $1 billion range. In the ideal case you could pay for this in cash, but let's assume that you need enough income to finance the purchase in retirement. Assuming a 20% down payment, a competitive 6.67% mortgage rate in todays market, a 30 year fixed loan, and a buffer for property taxes and insurance, a property like this should have a monthly payment of about $6.5 million. This translates to an annual expenditure of about $78 million. Not bad... but don't forget to budget for phantom costs like maintenance and utilities. I'd suggest to budget at least 10% of the home value, or about $8 million annually.
Transportation
While transportation might not be a big deal late in retirement, at least in the early years you'll want to be able to get around town. Running errands, visiting the country club, and showing off your wealth to your poorer-than-you friends is gunna require a suitable vehicle. Luckily there are a lot of choices here for the typical retiree. We will go with something at the upper end of the potential range, just to be conservative. A Rolls-Royce La Rose Noire Droptail would meet most people's needs in retirement. Assuming a 60 month loan term, $10,000 down payment, a 5% interest rate, as well as a healthy margin for taxes and fees rolled into the loan, you will be looking at a payment of about $614,132 per month or about $7 million annually. Of course, if you are married, you'll want to get a matching car for your significant other, so lets assume 2 cars for an annual transportation expense of about $14 million.
Food
As you get older, diet is going to very important. What you ate in your 20's isn't going to cut it anymore for your aging digestive track. As such this is probably an area you are going to want to splurge. Let's assume you are going to treat yourself daily to one of the more expensive Starbuck's coffees (budget $100 per day), have a nice affordable pizza for lunch (budget $12,000), and finish the day off with some healthy tacos and a tasty desert (budget $60,000). Doing this every day all year will set you back about $26 million annually.
If this seems a little bit steep, cutting out the morning coffee will take off about $36,500 of the total (but honestly don't, you deserve it).
Necessary Vacations
In your working years, you might not put vacations in the "necessary" category, but in retirement you are really going to want to get out of your house, no matter how much of a mansion it is, at least a few times a year. So for this calculation I'll include vacations in the "required" expenses column. Again, let's use some conservative numbers for a nicer vacation as the benchmark. For plane tickets, a round trip for two from New York City/JFK to Abu Dhabi on Etihad Airways seems like a reasonable target (budget $264,000). For lodging, you could always book a hotel, but for comfort, nothing is going to beat staying at your own personal vacation home. For simplicities sake, let's assume your home-away-from-home will cost about the same as your regular house (budget $78 million). You'll also want to consider transportation, but since this is for vacation let's skip the cars and assume you have a nice boat to take the kids and grandkids out on the water with. A nice boat can cost the same as a nice house, so we will assume a similar annual cost (budget $78 million).
Now keep in mind that the above budget was for 1 vacation. The typical American will go on about 3 vacations per year, so we will multiply the numbers above by 3 to get a conservative annual required vacation spend of about $470 million in retirement.
Wants and Charity
Alright, so we have calculated our required spending in requirement to be $86 million for shelter, $14 million for transportation, $26 million for food, and $470 million for necessary vacations. This leaves us with a total required annual spend of about $596 million. For ease of calculations in this next bit I'll round that up to $600 million. But how much should we reserve for wants?
Luckily we have the 50/30/20 rule which suggests we should spend about half of our income on needs, while reserving 30% for wants, and 20% for savings. Since we are assuming in this piece that you are already retired, you won't really need to save any further, however you may want to direct that extra 20% of income to good deeds like charity (after all, nothing get's you passed the bouncer and into heaven faster than a good bribe). So we will take our $600 million and multiple it by 2 for a total target spend of $1.2 billion annually on needs, wants, and charity in retirement.
THE NUMBER
"Okay", you might be saying, "that certainly tells me what I want to plan for in terms of spending, but what is THE NUMBER? What do I need to save for retirement?" For this we can turn to the handy 4% rule which says you can live off of 4% of your portfolio value each year adjusted for inflation. To make use of the 4% rule, just multiple your annual spend by 25 to get a total nest egg target of $30 billion. "But wait!", you say, "Can we really expect investment returns to continue into the future like they have in the past? Shouldn't we be a bit more conservative with our retirement nest egg?" No worries, instead of using the 4% rule, we can use the more conservative version, the 2% rule. In the vast majority of cases, you should not run out of money using the 2% rule in retirement. To use the 2% rule you can multiply your annual retirement spend by 50, instead of the 25 we assumed with the 4% rule. Applying the 2% rule leaves us with a total target nest egg of $60 billion ($1.2 billion x 50).
Having $60 billion as a target retirement nest egg might SEEM a little excessive, after all $60 billion would require you to save 100% of the average American's annual salary of $60,000 for 1 million years, however, it is entirely doable. There are at least 15 people in the world who have already met this conservative savings goal and are ready to retire. With some hardwork, a little bit of luck, and a strong focus on savings, you too can reach this conservative retirement target.
Going Beyond THE NUMBER
So we have identified THE NUMBER for a comfortable retirement ($60 billion) however, one thing to keep in mind is that even at this level of savings, you may want to continue working into your golden years. Working through your retirement at a job you love like running an S&P 500 company will give you more flexibility and options in retirement. It also has a number of benefits for your mental and physical health. This is why you see the wealthiest men on the planet continuing to work long after they have hit THE NUMBER. So if you have the health and mental fortitude to continue working past THE NUMBER I highly recommend you consider it for your own health and well being. Your future retired self will thank you.
With that, I hope I have demystified the math behind retirement savings and that you now have the confidence you need to start planning and saving for a comfortable retirement. Good luck! You are going to need it.
