Friday, June 19, 2009

How Much is Needed to Retire?

Is $1 Million Enough to Retire? by U.S. News & World Report offers some criteria to evaluate the question. According to the Geri Pell, a financial advisor, some of the factors to consider are:
  1. Location of retirement. There are low cost areas and high cost areas, e.g. New York City or San Francisco. $60,000 per year might be sufficient in low cost areas, but not in the high cost areas.

  2. Investment risk tolerance. Taking higher risk for higher returns, such as investing in the stock market, can affect the amount needed. In average times, the stock market offers 8-10% returns. Recently however, the stock market has provide negative or flat returns.

  3. Longevity. Someone who lives 40 years after retiring will need more retirement savings than someone who only lives 10 years after retiring.

  4. Amount of debt. Retirees without mortgage, auto or credit card debt can significant lower their retirement Boldexpenses, and thus reduce the amount of retirement savings needed.

  5. Lifestyle. The type of lifestyle impacts monthly expense needs, which determines the amount retirement savings needed.
While I agree with the basis for these factors, we had a simpler formula for determining the amount of savings needed for retirement. Since we planned to remain in the same location and keep the same lifestyle, we set a minimum savings goal of 12 times our salary, with a target of 20 times our salary. The basis for these numbers was based on an article by Charles J. Farrell, J.D., L.L.M "Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement" , which we used to determine How Much is Needed to be Wealthy.

In our case, it was fortunate that we targeted for 20 times our salary before retiring in October, 2007. We actually retired with savings at 23 times our salary. However, the bear market of 08/09 reduced the amount to 13.7 times our pre-retirement salary by March 31, 2007. For us having a savings margin of safety was a prudent decision giving the subsequent recession and bear market.

For more on Reaping the Rewards Reflections, check back every Friday for a new segment.

This is not financial, saving or retirement advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

1 comment:

Todd R. Tresidder said...

Wow! To drop from a savings to salary ratio of 23 to 13.4 is shocking! Your volatility of returns is dangerously unacceptable. This is not my opinion but proven out by math.

It is important to understand the mathematical relationship between average returns and compound returns. Compound returns are the only returns you can spend, and they are dramatically lowered relative to average returns with the type of volatility you are experiencing. (An excellent explanation of the subject can be found in "Unexpected Returns" by Easterling.)

If you seek financial security then it is essential to develop investment risk management skills to control volatility and downside risk.

Getting your retirement savings lopped in half is not acceptable, and anyone who tells you otherwise doesn't know their math. You must have a defensive strategy to manage the risk or you will never have retirement security.

Hope this helps to point your investment strategy in a positive direction.

Todd Tresidder