The Simplest Retirement Plan?

Simple retirement math for people who just want to know if they're on track

We've dissected the idea of a "retirement number," the dollar figure that a financial plan or calculator spits out as being how much you need. At some point, we've all done this and at the very least it's a decent frame of reference. I've also been critical of the idea because no matter what someone once told you is your number to retire at 65, once you get there, whatever number you actually have is your reality. If at 40, someone said $1.1 million and you get to 65 with $830,000, the $1.1 million means nothing.

Another element of this entire process is periodic assessments to make sure you're generally where you should be. If you're ten years away from where you think you want to retire or 20, it makes to isolate and address any serious potential shortfalls. That which is serious will depend on the individual, it's all fair game, it's your money and your retirement. Also relevant is an understanding of normal market behavior at a point where emotions are not likely to be running high. Normal market behavior includes the reality that in just about any ten year period the US stock market is going to be up, not down. The size of the gain might be great, like the last ten years, or nominal, and of course negative is always a possibility.

For people who do not want to crunch numbers or pay for someone else to do it for them, I think there is a way to do a very simplistic, even if not totally accurate, periodic assessment. Start with how much you have now. How many years until you hope to retire? How long will it take for your money to double, or put differently what might your retirement balance be on your planned retirement date? How much are you likely to save between now and when you retire? There will be a little math but not serious number crunching.

Let's say a 50 year old has $500,000 and wants to retire at 65. Assuming a 5% average annual return (of course returns won't be linear) and with a little help from the rule of 72, when this person is 65 their current balance would be $1 million. Making a static assumption about future contributions, let's say $1500/mo for the next 15 years, they'd have another $270,000 (plus whatever that money gained). This 50 year old needs to then figure out whether a 4% withdrawal rate plus Social Security (or they can leave that out to be very conservative) plus any other visible sources of income will get the job done. If that is a little short, what about a 5% withdrawal rate? We all know that 4% is believed to be the optimal withdrawal rate for sustainability but 5% still has a very strong likelihood of sustaining.

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