“I have no idea how much I would need for retirement.”
Fear of Being Poor in Retirement
That is the frustration expressed to me recently over brunch. This friend of mine is a highly accomplished academic physician. He is well-traveled, well-educated and makes a great income. He had read articles and tried calculators and talked to an adviser. It was all complicated and yielded differing results. After working on the problem he was even more confused and anxious.
In subsequent discussions with other colleagues, I realized he is not alone. Many physicians truly don’t have enough set aside for retirement. The majority of physicians have less than a million dollars. Half of all physicians have less than 500K. A minority in their 50’s and 60’s have several million in retirement savings.
Others have plenty but are not certain and are therefore too afraid to retire. They see no hope of retirement while they are young, healthy, and active. Either scenario is sad and avoidable.
Measure Your Wealth in Time
Back to my physician friend who asked me for advice. I recommended he keep it very simple. One measure of your wealth is how many days forward you could live at your current standard of living without working. That measures wealth in time rather than money. I learned this from Rob Kiyosaki who in turn learned it from Bucky Fuller.
If you have $250K and spend 50K per year you could live just fine without working for five years.
How can you apply this concept? Simple. Keep all your figuring in today’s dollars. This assumes that factors like inflation and investing cancel each other out which actually is a pretty reasonable assumption (e.g. inflation and returns both 3-4%). That makes the math super easy.
The formula then becomes:
The amount I need for a complete retirement = my annual expenses x # years in retirement.
How easy is that?
How Would This Actually Work?
Here are a couple of examples:
Let’s say I spend $100K/year. I expect to retire at 70 and live until 90. I need 20 x $100K or 2M.
If I spend $120K/year and want to retire at 60 I will need 30 x $120K or 3.6M.
One final example closer to my actual world:
Let’s say I’m 51 and spend $90K/year. To retire now and live until age 90 I would need 39 x $90K or $3.5M.
Interestingly, $3.5M is the amount I would need according to much more complicated computer analyses using conservative assumptions, historical data, and Monte Carlo scenarios.
If you are worried this is too simple to actually be reasonable you should know that it is endorsed not just by “yours truly” but by Ashvin B. Chhabra.
Dr. Chhabra was Chief Investment Officer for Merrill Lynch Wealth Management and chair of the Board of Regents for the Financial Analysts Seminar of CFA Institute. He is a brilliant investor and has also written a great book on this subject: The Aspirational Investor.
What do you think? Have you ever been overwhelmed with not knowing how much money you need? Dizzy from online retirement calculator projection scenarios? Maybe this simpler approach can get you in the right ballpark.