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You have roughly 45 years to save for retirement. And while the first 10 were the most important, the final 10 are the most telling.
If you diligently saved (invested) from age 22 all the way through age 57, the final decade of your work career should be a snap. Even if you got started late or have been underfunding your obligation to your future all along, a couple of different rules of thumb can bring you solace and/or provide you the motivation you need to complete the job.
But since we’ve come to learn the etymology of the phrase “rule of thumb” is heinous, we shall adopt Rules of Peter instead.
As with any generalization, understand these Rules of Peter might not work for your particular situation. However, they should provide a great topic of discussion for you and your financial adviser.
Rule of Peter No. 1
You can retire when you have 25 times the amount of money you plan to live on annually in retirement. This particular rule helps answer the age-old question, “How much money do I need to retire?” Which, by the way, is a question I field almost daily.
As I’m oft to answer, you can determine how much you need by choosing an annual income goal at retirement, subtracting any established streams of income such as Social Security retirement benefits, rental income and pensions, then multiplying the remaining number by 25.
For instance, if you want to have $125,000 available to you annually when you retire, here’s how you can determine the assets you’d need to accomplish your goal. Begin subtracting your annual Social Security benefits, assuming the benefits will be available when you retire. For this example, you’ll have $45,000 available to you between your and your spouse’s benefits. And we’ll assume you don’t have any rental income or pensions. Subtract $45,000 from $125,000 and you’ll have $80,000. Now multiply $80,000 by 25, and you’ll get $2 million. You will need roughly $2 million to provide the $80,000 you desire annually.
If you’re skittish, conservative, or simply want to err on the side of caution, increase the multiple from 25 to a number closer to 33. At a multiple of 33, you will need $2.64 million instead of $2 million.
Rule of Peter No. 2
You’re in really good shape if you have half the assets you need 10 years out from your retirement date. Half. That’s what you need. It blows my mind every time I see it, but half is what you need. Before you get the phrase, “How is that possible?” out of your mouth, I’ve already screamed, “Compound interest!” It’s a bit crazy to think about, but it takes 35 years of work and savings to get to whatever number you have at age 57, and theoretically only 10 more years to double that number.
Assuming your money is properly invested, and not just saved, it should double within that 10-year period. If you don’t contribute another dime to retirement in those final 10 years, which of course is a ridiculously bad idea, you’d need to average only a 6.96 percent rate of return to double your money. If you’re aggressively saving for retirement in your final 10 years exactly as you should, you can average less than a 6.96 percent rate of return.
Over the 10 years ending Dec. 31, 2018, a 60 percent stock and 40 percent bond portfolio has averaged 7.19 percent, and 6.75 percent over the last 20 years.
Bonus Rule of Peter
When faced with an ugly reality upon evaluating Rules of Peter No. 1 and No. 2, attack the demand side. You’re not alone if the first two rules have you feeling your current or projected supply of money isn’t sufficient. And you’re likely scrambling to find more dollars to set aside. The best way to accomplish this is to focus your attention on living on less right now. Too many people believe they’ll be able to make spending adjustments once they get to retirement, therefore sparing themselves the obligation of discretion leading up to retirement. That’s an absurd strategy. Use the final 10 years to wean yourself off your work income so you can more realistically meet your available retirement income.
None of these rules are perfect. They’re really meant to identify major deficiencies. If you happen to identify a major shortfall, take action immediately. The passing of time will make your problem exponentially worse.•
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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.
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