I use the word “Magic” in the title here in quotes because knowing Jason as I do, the connotation of it – simple! presto! – would make him cringe.
We built our wealth management practice around the idea of retirement and financial planning for families. Lots of people may initially come to us for asset management or investment recommendations but without a really defined sense as to the why, other than some vague sense that having more money in the future is better than having less money. And so our first job, in these cases, is reorientation. What are we investing for in the first place?
Anyway, Jason Zweig has one possible answer for how much to save for retirement and it’s a simple concept. The problem is, while the idea may be easy, executing it will not be for most. Because it requires discipline – like almost everything else worth accomplishing in life…
From the Wall Street Journal:
To be assured of having enough money to fund a comfortable retirement, you should save a total of 22 times the annual income you want to earn when you retire. That is higher than many previous estimates, but it offers near-certainty of hitting your target.
For instance, if you want $100,000 in annual income (not counting Social Security), then your magic number is $2.2 million in total retirement savings. You can hit that magic number if you are prudent and willing to save money like mad.
Now, of course, this gets tricky when you’re either really close to retirement or really far away.
When retirement is less than a decade away, there’s a good chance you’ve already passed through your peak earnings years and you’re slowing down. This means there may be less income coming in, thus making it harder to save. The good news is that the kids are probably out of the house (and your refrigerator).
When retirement is really far away – more than two or three decades – who knows what a number like $100,000 will actually mean? A lot of our work on the planning side for clients is predicated on getting the inflation-adjusted cost of things right and leaving enough flexibility in the future for changing tax rates and other unpredictable variables that could have a large impact. Your jaw would drop if I showed you what $100,000 income looks like, in real terms, years from now.
Anyway, head over for Jason’s piece, it’s really good food for thought on the topic.