How Much Money Do I need To Retire?

Today's Overview:

• Experts predict that by 2050, living to 100 will become the norm, thanks to a "longevity revolution" impacting healthcare, finance, and more.
• Challenges include addressing racial disparities in longevity, combating social isolation at age 100, and financial planning for longer lifespans.
• Common retirement myths are debunked, emphasizing the importance of early planning and reimagining retirement as a fulfilling, active phase of life.
• Different approaches to retirement savings are discussed, such as Fidelity's Rule of 45 and the concept of reaching "critical mass" in investments.

In a groundbreaking revelation, Stanford University's Center on Longevity envisions a future where a remarkable 50% of today's five-year-olds will live to celebrate their 100th birthday by 2050.

This "longevity revolution," as recognized by the United Nations, promises to reshape our perspectives on healthcare, personal finance, and retirement.

It also raises critical concerns, including addressing racial disparities in longevity, combating the social isolation of seniors, and highlighting the necessity of early and robust retirement planning.

As we navigate this new landscape, securing both financial stability and emotional well-being for a potential century-long life becomes an increasingly vital endeavor.

The Retirement Trap

The Wall Street Journal recently made a cool chart about how retired folks spend their time.

Source: Wall Street Journal Article Here’s What Retirement Looks Like in America in Six Charts - WSJ

Retirees spend most of their time sleeping (9 hours), relaxing (6 hours), and watching TV (4.5 hours).

There's little time for reading (0.5 hours), socializing (0.5 hours), or exercising (0.3 hours).

Our romanticized view of retirement doesn't always match reality.

We often delay happiness, believing some grand achievement will bring eternal joy.

While financial security is crucial, fixating on wealth can rob us of life's simple pleasures and connections.

The idea that money alone guarantees happiness is flawed.

It's a trap to defer happiness until retirement, missing out on life's joys along the way.

Reframing Retirement:

Here's my opinion: we should reconsider how we view retirement.

The traditional idea of retirement is that you work hard for many years, then finally get to enjoy life afterwards. However, I believe this concept is flawed.

We project our current selves into the future and become so anxious about saving and investing for retirement that the required amount seems insurmountable and intimidating. It's even so daunting that some of us never even start.

The reality is that we need a lot less for retirement than we believe. This doesn't have to be as difficult as we make it out to be.

A Thought Experiment to aid in Retirement Planning

Dr. Peter Attia's book, "Outlive: The Science & Art of Longevity," introduces a unique concept: focusing on the ten essential physical tasks you want to perform throughout your life.

These tasks can range from athletic challenges to everyday activities, like playing with grandkids or hiking.

Dr. Attia's idea serves as a reminder to stay active and healthy as we age, aligning our actions today with our desires for a vibrant future.

This approach isn't limited to physical tasks; it can also be applied to holistic retirement planning, ensuring overall well-being in our later years.

Your Ideal 80-Year-Old Life

What does your ideal life look like at age 80? What does your idea life look like when you are 70 or 65? How about when your are 40?

• Who are you with?
• Where are you?
• What are you doing?
• How do you feel?

Here's how I picture my perfect life when I'm 80 years old:

• I'm healthy, both in body and mind.
• I'm sitting on a sunny porch with my happy wife beside me.
• My kids are around, and we're having conversations.
• My grandkids are playing in the yard.
• Friends come over for a big dinner.

Notice that most of these things don't depend on having lots of money. They're not things you can buy; they come from how you act and what you do every day.

Starting by thinking about this ideal future helps you figure out what you should focus on right now:

• Want to be healthy at 80? Take care of your body and mind every day.
• Want a happy partner? Be loving and caring every day.
• Want your kids to want to be with you? Be a supportive and loving parent every day.
• Want good friends you can laugh with? Be a loyal and fun friend every day.

This simple exercise can change how you live your life today. It helps you understand what retirement really looks like and what really matters. It makes you start with the end in mind.

Action Steps

Take a journal or a piece of paper and write it down:

• What does your perfect future look like?
• What does that mean you should do today?
• Now that we’ve softened up what retirement looks like, how much money do you need?
• Use my Critical Mass Index Guide and Calculator to help you decide how much money you need to save for retirement.
• Get started.

Write it down and keep it somewhere you can see it. It'll be like a map guiding you where you want to go. You may have to do this again as life changes.

How Much Do You Need for Retirement?

Planning for retirement involves strategic financial management and foresight. It is the process of determining retirement income goals and the actions and decisions necessary to achieve these goals. This includes identifying sources of retirement income, estimating expenses, implementing a savings program, and managing assets and risk.

When it comes to expert opinions and calculations on retirement savings, there is a range of advice. Some financial experts recommend saving at least 15% of your income and aiming to have at least 70 to 80% of your pre-retirement income to maintain your current lifestyle. Others suggest a target of 10 to 12 times your current income.

Fidelity Rule of 45

Fidelity, for example, provides a guideline based on multiples of your salary.

By age 30, it suggests having the equivalent of your annual salary saved. This increases to three times your salary by age 40, six times by age 50, and finally, ten times your salary by age 67.

Fidelity has developed these salary multipliers as a simplified way to help individuals assess their retirement savings in relation to potential income needs during retirement.

These multipliers are based on age and assume a 15% savings rate, a constant real wage growth of 1.5%, a retirement age of 67, and a planning age through 93.

The target for replacement annual income is set at 45% (rule of 45) of pre-retirement income and does not include pension income.

Fidelity created these multipliers using market simulations that account for various market conditions.

The target % for income replacement adjusts based on the age at which you retire and claim Social Security benefits: it increases for earlier retirements and decreases for later retirements.

Additionally, the target for income multipliers may vary depending on the desired lifestyle in retirement.

These calculations are hypothetical and do not guarantee actual results, as individual situations can vary significantly.

Ultimately, the amount you need to save for retirement is highly personal and depends on your individual goals and circumstances. 

You can check out Fidelity's widget here: 

Fidelity's Widget

How to Calculate Your Retirement Savings Using the Critical Mass Index Method

While Fidelity’s Rule of 45 is a simple and easy way to help point you in the right direction, saving 15% of my income until retirement seems absurd to me.

I want to enjoy my life now and in retirement, whatever that means to me.

That’s why I like to take a different approach. I approach retirement planning asking one simple question.

How much money would I need to save to get to critical mass in my investments?

The reason rich people don’t concern themselves with retirement is because they already have money. They already have critical mass in their investments. Their money works for them, so they don’t have to.

Here's a simple way to calculate your retirement savings using my Critical Mass Index Calculator:

1. Identify Your Critical Mass Index: Critical mass in investing refers to the point at which your investment portfolio reaches a size where it can sustain itself and potentially generate significant returns without needing additional capital injections. This is the point of financial independence for your investments.
2. Estimate at What Age You Will Reach Your CMI Goal: If you saved 10% of your income for instance, how long would it take you to reach your goal?
3. Estimate Your Annual Expenses in Retirement: Consider your current lifestyle and how it might change in retirement. Use the rule of 45 then this will be 45% of your income. If you want to be more conservative, then adjust this number up some to say 65% or something you're more comfortable with. 
4. Estimate Your Life Expectancy: This can be tricky, but it's better to overestimate than underestimate. You don't want to outlive your savings!
5. Adjust for Inflation and Investment Returns: Because the value of money decreases over time due to inflation, your savings goal will be higher in "future dollars". Additionally, your savings will likely grow due to investment returns. You can use an online retirement calculator to make this adjustment.
6. Do you have enough: If you don’t have enough, then there are only one thing to do, save more or continue saving past your CMI savings goal age deadline.

Remember, it's always a good idea to consult with a financial advisor when planning for retirement. They can help you refine these estimates based on your personal circumstances.

Conclusion

In conclusion, planning for retirement is a crucial step in ensuring financial security and a fulfilling future.

It is essential to debunk common myths and misconceptions surrounding retirement savings and understand that the amount needed for retirement is highly personal.

By considering factors such as lifestyle choices, goals, and potential sources of income, individuals can develop a tailored retirement savings plan.

Utilizing tools like the Critical Mass Index Calculator can help estimate savings goals and determine the age at which financial independence can be achieved.

Consulting with a financial advisor is always recommended for personalized guidance.

Remember, retirement is not just about financial preparedness but also about envisioning and pursuing a fulfilling life in your later years.

Start planning early and make informed decisions to enjoy the retirement you desire.