How Much Money Do You Need To Retire?

I was lucky enough to meet Todd Tresidder, author of the book How Much Money Do I Need To Retire, a few years ago at a conference.

I’m really glad I did, because he introduced me to his book exactly at the time I needed it. It helped me figure out what to consider when figuring out how much money I needed to retire.

I’ve been saving at a decent pace for retirement, but I had no clue if I was saving enough or how to plan how much I really needed to save for retirement.

I had run some numbers based on the common retirement calculators you find around the internet, but I always felt they didn’t allow me to properly adjust the variables for the situations I wanted to test.

Even though I knew the retirement calculators I found on the web didn’t share the whole story, I was blown away by how much I was really missing when I read Todd’s book for the first time.

Todd is a retired hedge fund manager and really knows his stuff. He could have written the book based on his personal knowledge, but instead he took the time to quote some amazing research that really drove his points home.

So what concepts did Todd open my eyes to? Here are just a few things you’ll learn in Todd’s book.

Order of Investment Returns Matter

Every retirement calculator I’ve ever used has you input a number for what you expect your investment returns will be. Some make it a bit more complicated and have a pre and post retirement investment returns number.

The problem with these methodologies is, even though your investment returns may average out to that number over the long run, the order and timing of the returns matter much more.

This is especially true as you start drawing down on your retirement funds. If you have big losses as soon as you start withdrawing from your retirement portfolio, you may never recover.

Todd does a great job of explaining this in his book and you could be shocked by the how important this concept is.

Two Key Numbers That Will Completely Change Your Retirement Planning

If you haven’t ever read about these two key numbers, then you might be surprised at the significance of them. The first number is percentage of income saved vs percentage of income spent.

After a bit of thought, it makes sense that if you save more then you’ll spend less, assuming you don’t go into debt. However, this ratio is capable of determining how many years it will take you to be able to retire. Todd includes a chart in his book and the results could make you rethink your retirement planning.

The second number that will completely change your retirement planning is almost completely outside of your control. The second number is your return on investment minus the inflation rate.

This is the real growth of your retirement assets. Inflation is completely out of your control so you’ll need to monitor and adjust for it as you get closer to retirement.

As far as investment return goes, you can invest in riskier or safer assets to change the magnitude of your investment returns, but it is highly unlikely you can actually earn a set investment return each year.

These numbers, investment returns and inflation rates, have a huge effect on your retirement because of the effect of compounding. Todd does a great job of explaining this and its impact in his book.

These are just a couple of many things Todd will open your eyes to if you read his book, How Much Money Do I Need To Retire.

If you want to pick up a copy, you can order it on Amazon as an eBook or a physical book. If you do buy his book through the links in this post, I will receive a small commission as I am an affiliate of Amazon.com.

Have you started planning for your retirement yet? What challenges have you run into so far?

Would You Give Up Vacations Forever To Retire Earlier?

Love family vacations or a quick beach vacation? What about financial freedom? What if I asked you if you'd give up vacations and travel forever to retire early? Would you do it? Find out my thoughts and how not vacationing can allow you to retire early and reach financial independence faster. Early retirement may be worth it!

Vacations are awesome.

I love spending some time relaxing outside of my normal environment. My wife does, too.

We normally take at least one vacation a year, sometimes two, just to enjoy our lives a little bit.

I can’t imagine living our life without vacations, assuming we can afford them of course.

After all, we’d never take a vacation if we couldn’t pay for it in full in cash or credit card rewards.

Related: How Credit Card Rewards Paid For Our Cruise!

That Could Change

I came across someone on Twitter recently that had a different opinion that I just couldn’t wrap my mind around.

This person stated that you should never take a vacation because it’d delay your financial independence date.

Instead, you should invest all of the money you would spend on your vacations so you can become financially independent sooner.

My mind was blown. How can someone not see the benefit of vacations?!

Related: The Ultimate Financial Goal & Exactly How To Achieve It

Why I Feel Vacations Are Awesome And Much Needed

Vacations are a huge benefit to us. They allow us to recharge our mental batteries which is a necessity after many months without any extra days off.

They allow us time to forget about the day to day worries of life and just relax. We could probably find a way to do the same thing at home, but it wouldn’t be the same. Why?

Vacations allow us to go out and explore new areas and broaden our life experiences. We have already explored most of the parts we’re interested in exploring in our local town, so we wouldn’t be adding much to our experience list by hanging out here.

Vacations also allow us to not have to worry about the daily responsibilities we have to take care of at home. Unfortunately, all of that awesomeness comes with a price.

Related: Are Staycations Really Cool?

Why I Could See The Other Person’s Point

For some people, their jobs are shackles that are so powerful that they’ll do anything to escape them.

Rather than take just a temporary escape (a vacation) that pushes back your permanent escape even further, why not just stay home forever and never vacation in order to retire earlier?

Chances are vacations cost more than a typical week at home, so you’d be delaying your retirement for much more than the week or two you’re off exploring the world.

Of course, vacations aren’t the only frivolous spending in a budget. If you really want to retire as early as possible, you can cut out many other expenses in your life and live a bare minimal lifestyle.

But would it be any fun? For some people it may be, but for others, I think there is a good compromise you can come to in order to both retire earlier and still take vacations.

A Nice Compromise

Instead of spending thousands and going all out for your vacations one or multiple times per year, you can compromise a bit and still enjoy the benefits of vacations for a lower cost.

If going out of town isn’t an option because it is too expensive, you can plan a staycation in your town. Instead of going to an exotic location and staying in a hotel, rent a room on AirBnB or VRBO.com. Better yet, go camping and enjoy nature and disconnect from the conveniences of modern life for just a few bucks a night!

I don’t think you need to forgo vacations completely to retire earlier. There are many cheaper options that will give you close to, if not exactly the same benefit that a ritzy expensive vacation would.

So, what do you think? Do you think vacations are necessary or a complete waste of money? Or, do you take the compromise route and still take vacations but just at a cheaper rate? I’d love to hear your thoughts in the comments below!

Would Knowing When You Will Die Change Your Finances?

would you change your finances if you knew when you would dieWould you change how you deal with your finances if you knew the exact date you were going to die?

I would and I’m sure you would, too.

Unfortunately, no one knows when they will die, so you must plan for your best guess of your future.

How Many Years You Probably Have Left To Live

I came across this crazy website that tells you, through an awesome visualization, how many years you probably have left to live.

Basically, you input your gender and your age and it runs probabilities over and over again, dropping a ball at the age you would theoretically die.

After it runs for about 100 to 1,000 times, you’ll start to see a pattern for how likely it is you will die within a range of years. For instance, you may have a 1% chance of dying in 0 to 9 years, 2% in 10 to 19 years, 10% in 20 to 29 years, 20% in 30 to 49 years and 77% chance of living over 50 years from today.

If you want to see results faster, make sure to click fast mode. You can even leave the tab running in the background and come back later if you want a more statistically relevant sample.

The Results May Change Your Planning

If you weren’t realistic with your personal estimate of your life expectancy before you ran the simulation, the results may have shocked you.

Granted, these are super generic results, but it gives you a better idea than if you were just completely winging your estimates. Your results from the simulation may say you’ll live much longer than you expected or much shorter than you expected. The real question is what will you do with that information.

Not Saving For Retirement?

If the results are realistic for your personal life situation, then you need to seriously take a look at your financial plans and see if they fit the reality.

If you were relying on working until you die and your life expectancy says you could easily live into your 90s, do you really think you’ll still want to work until you die? I doubt it.

Instead of continuing down the path of saving nothing for retirement, start saving today. Even if you just save a little bit, you can continue to build on that momentum until you’re saving a realistic amount of money.

Are You A Super Saver?

On the other end of the spectrum, you could be a super saver that assumes you’ll live to 100. While you may very well live to 100, the simulation I ran didn’t give me a very good chance of reaching that goal.

If you’re sacrificing now to make sure you won’t run out of money until you’re 110, you may want to dial back your savings rate to enjoy life more now.

These Are All Statistics – You Could Be The Outlier

While the simulations that are run are all based in probabilities, you have to remember you are a single dot on the simulation. You could be the person that dies in 9 years or you could be the person that lives to 105.

You need to plan for a reasonable lifetime. Don’t use this as an excuse to not save for retirement because the simulation told you there is a 20% chance you’ll never make it to full retirement age.

At the same time, use this as a wake up call. There may be a 20% chance you won’t make it to retirement age. Make sure you’re living life to the fullest and enjoying at least a little bit of your money now.

Yes, saving for retirement is smart because there may be an 80% chance you’ll get there. Just make sure you aren’t solely living to retire or you may miss out on life.

One last thing… Don’t make knee jerk reactions. Make sure to talk to your financial advisor before changing any plans you make already have. Only you and your advisor know your whole situation.

Did this simulation change the way you think about saving for retirement? Did it cause you to save more for retirement? Did it make you sit back and think about living life a bit more now? Let me know in the comments below.

Photo by: chindit76 Text added by: Lance Cothern

Are You Saving More For Retirement Yet?

Do you want to retire? If so, part of your retirement planning should likely include saving more for retirement. You'll be thankful you enacted this retirement idea today. Find out if you should be saving more for retirement on MoneyManifesto.com.People commonly state that they’re waiting until some unspecified point in the future to increase their retirement savings.

People say “I’ll increase my savings rate when I get my bonus, my next raise, when i turn 30 or next year when I have a bit more breathing room in my budget”.

Well, I’m here to tell you that next year is here and it is time to increase your retirement contributions.

Just to show you that I’m not talking the talk but actually walking the walk, I just increased my Roth 401(k) contributions by more than half of my recent pay raise.

All I had to do was log in to my 401(k) account and change my contribution percentage. It took a total of about three minutes and was so easy that I bet a kid could do it if you told them what you wanted done.

Why Increasing Your Retirement Contributions Is Important

Unless you are a retirement savings superstar, most people only contribute just a few small percent of their income to their retirement accounts. My employer’s default savings percent is only 3%, which is nowhere near enough to retire on.

Even when you consider your employer match, I’d only be saving 6% of my income for the future. Plug that into the calculator below and you’ll see that is nowhere near enough to retire on. However, at least these programs get people started with their retirement. Many people who don’t have access to auto enrolling 401(k)s don’t contribute at all!

Knowing that most people start at such small contribution percentages highlights the need for you to increase your retirement contributions. I personally think saving 15 to 20 percent of your income for retirement is a reasonable goal if you start investing when you are in your 20s. If you start later in life, you may need to save an even bigger percentage of your income.

A Cool Tool To Help You Visualize Your Retirement Savings

Figuring out how much is enough to save can be difficult. For that reason, I’ve included this cool tool below that will help you visualize how increasing your contributions will change your retirement nest egg. The tool is from Personal Capital, a pretty cool company that is helping people invest for retirement.

In fact, if you link over $100,000 in investable assets (including 401(k)s) to your Personal Capital account, they’ll set up a free call with one of their financial advisors to review your investments. Of course, they’ll try to get you to sign up for their advising service as well, but either way I think it is a great value just for signing up to use their software!

You can sign up with Personal Capital here after you check out the tool below.

Post continues below this tool…

Now that you’ve had some time to play around with the tool, you can see increasing your retirement contributions even just a little bit can have a huge impact on your retirement!

Go Do It Now!

So why are you still sitting there, pondering whether or not to increase your retirement contributions? Go do it now. Call your retirement account provider. Walk down to your HR department. Type your retirement account provider’s website into a web browser. However you change your retirement contribution amount, go get it done now. You’ll thank me when you retire.

You May Need More Than Four Million Dollars To Retire – No Joke!

Want to retire early? You might want to rethink your decision. How much money do you need to retire? I couldn't believe it initially, but you may need $4,000,000 or more to retire... seriously! Find out why on MoneyManifesto.com.For the purposes of this article, I’m assuming you only want to rely on income from your investments to fund your retirement. That means no social security, no pensions or no other outside income.

I’m sure you constantly see articles about retirement and how to save $1,000,000 by the time you retire.

They make it seem like $1,000,000 will be enough to live on for your whole retirement, no matter what age you are today.

The Reality – $1,000,000 Isn’t Enough

Unfortunately, the facts for many people are much different.

Unless you’re planning on retiring today and living on $40,000 a year or less, having just $1,000,000 in retirement savings won’t likely get you through retirement.

Whenever you see these articles, they always state if you start investing at age 25 you only need to invest something like $322 a month at an 8% return to get $1,000,000 by the time you retire at 65. However, you would need to invest $736 a month if you wait until 35, which is over twice as much.

These facts are true and they’re a great example of how important investing early is in relation to compounding returns. It really drives the point home that you need to start investing as young as possible to get the most out of your money.

The problem with these articles is they aren’t telling you to invest enough. They lure you to believe that $1,000,000 is all you need.

Inflation Will Wreck Your Retirement Plans

Sadly, it’s too late to take advantage of compounding when you find out you need more. Depending on how much income you’ll need, you could require anywhere from $2,000,000 to $7,000,000 or more when you retire. It is even harder to hit those marks when you’re already 20 years into your plan and behind when it comes to your current savings.

If you’re 25 today and want to live on $40,000 a year in today’s money, you’ll need a lot more than $1,000,000 when you retire. Why? Inflation.

If inflation averages 3.5% a year (a historical average), then you’ll actually need $3,959,250 to satisfy the 4% rule and live off of $158,370 a year (today’s equivalent of $40,000 a year). Shocking how much 3.5% inflation can change things, eh?

In order to reach the goal of $3,959,250, you’ll need to invest much more than the amount you’d need to get to the big round $1,000,000 number. In fact, if you start at 25, earn an 8% return and inflation is 3.5% (that’s a lot of assumptions), you’ll need to invest $1,274 a month in order to live off of that $40,000 in today’s dollars when you retire.

No Longer Young? It’s A Scary Future

Things get worse if you’re 25 today and you decide to wait until 35 to start investing. If that was the case, you would need to invest $2,913 a month to reach that same goal. If that isn’t a wakeup call, I don’t know what is. You never hear this side of things in the mainstream media.

Assumptions Cannot Be Relied On

The other thing you never hear the big news articles discussing is all of the assumptions they make. The two big assumptions, investment returns and inflation rates, can vary wildly in the future just as they have in the past.

In 1980 inflation was 13.58%! If that happened for a prolonged period of time, you’d have to adjust your plan quickly and invest a ton more to make sure you hit your goal of $40,000 of inflation adjusted income when you retire.

In the 2010, the S&P 500 10 year annualized returns were only 1.41%! Again, that is a huge departure from our 8% assumption. If that happened for a long period of time in the future, you’d have to make adjustments to your plan.

Get Started Today No Matter How Small Your Contributions Are

Planning for retirement income is no easy task. It is extremely important you get started early because the future isn’t certain. It is that uncertainty that you need to get ahead of.

If you haven’t started investing yet, start investing today. It doesn’t matter if you can’t hit your ideal monthly retirement savings goals today. Start with something and work your way up to get to that level. You’ll be amazed how much easier it is to work toward your goal when you actually start working on it.

What do you think about the media’s emphasis on the magical $1,000,000 number? Is it time we accept that we need more than $1,000,000 to retire?

Note: I do think Social Security will be around in some form when I eventually retire decades from now, but it won’t be anything like it is today. That’s why I don’t rely on it in my retirement planning, if it is there when I retire, it will be icing on the cake.

Image by: Ervins Strauhmanis Text added by: Lance Cothern