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Jarob wrote:

I was hoping for a little insight from all you Fools. I am 48 and looking at retirement. What I need to
know is how much money is enough to retire on? It will need to last me 35 years and I have a current
income of about $75K. Any Ideas on figuring a target number? I will also work after retirement at
something I like. But it won't generate much income. Probably just fun money. Thanks in advance for
your ideas.

Hope you make it soon, Jarob. If anyone tells you need $400K, $700K or even two million, just ignore them--there are just too many personable variables (kids, health insurance, early pensions, lifestyle, etc) to just take a number someone hands out to you. If anyone tells you that you need a certain amount based upon your current salary and an on-line 'retirement calculator,' just ignore that too. The last one I walked through confidently told me that I would spending twice what I live on now when I was retired and then went on to figure an enormous sum that I needed to have to generate that income using a very low rate of return because retired people (even ones with 35 years of life left) should invest very conservatively. It is pretty sad to see these telling so many people that they need twice what they, in all probability, really do need to retire early. I feel very sorry for people who think they have to work an extra 10 or 15 years, simply because a big investment company's retirement calculator tells them they do.

What you can be sure of is what it costs you to live right now and that is where I would start. Go back over your checkbook and bills for the last 12 months and come up with your annual expenses. Then pretend that you were suddenly retired and adjust that amount up or down for changes such as higher health insurance costs, lower commuting costs, more vacations, cheaper vacations, lower taxes, fewer lunches eaten out, less life insurance--you get the idea. Most things don't change. You will still be paying the same cable bill and telephone bill in all likelihood, so just forget them. What you should have is your new annual living expense bill. Lets say that comes to $50,000 a year. Now subtract out any early pensions you are going to get. Let's assume you expect to get $2000 a month in a buyout program. That leaves you with (50,000 - 12 X 2000) $26,000 a year that you now need to keep the same lifestyle.

The MF recommends (somewhere in the depths of their retirement pages) that you just multiply this number by 20 to arrive at the amount you need for early retirement. I your case 20 X 26,000 = $520,000. That is amount you need to retire early. Well, not quite. The 20X factor is simply a 5% initial drawdown increased by 3 (or is it 4%?) inflation each year. In other words, you take out $26,000 the first year and $26,780 the next and $27,583 the next and so on.

There is still some work to do. The 20X factor is predicated on keeping all or most of your money in stocks and you may not be willing to do that. You must also remember to add in any know large expenses such college for your kids and the yacht you always planed to buy. Social Security? You might want to work in a reduction for when (and if) that kicks in. Also, when all those kids finally move out, you may find that your grocery bill, if nothing elese, drops quite a bit. Already bought your retirement house in Mexico? Another adjustment. Although average inflation is supposed to be factored into the 20X multipler, your buy-out pension may not have any inflation adjustment and you may want to adjust the annual amount needed a bit for that.

Even when you are happy with all the adjustments you make, the final figure will still be a moving target, of course. What you figure now for your early retirement number may well change by the time you get to the magic 53 or 55 or whenever from the 48 you are at now, but at least it gives you a number to start with that will be a lot better than an on-line retirement calculator. Stick all this in a spreadsheet, and you will find it easier to track it and make changes as times goes buy.

I also like the idea in YMOYL where you chart your monthly/annual expenses to see how they grow (or shrink as you reduce your consumption). I use a spreadsheet for this too and use a 12-month running average to smooth things out. I also track the growth of my investments to better project how long it will be before I reach the needed number.

Good luck,
-- John
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