The Only Number You Need to Know to Retire
Retiring is easy, its funding a decent lifestyle in retirement that is difficult.
Everyone makes retirement planning way too difficult. It should be very simple. Let's see what we can do to simplify it in this blog.
The ultimate goal is to have enough in savings to support you for the rest of your life. Complexity comes because we try to factor in things we do not know and cannot control. Let's focus on the things we can control. For the uncertain aspects, I will share some rules of thumb that work pretty well.
First of all, the only number that matters as you prepare for retirement is your Savings %. How much of your salary are you saving every year?
In formula it would be: Savings / Income = Savings %
Is it 5%, 10%, 15% or more? This is all you need to worry about when thinking about retirement. I will get into why in a moment. Before I go there I want to look at a related question.
How do you know when you have enough to retire? My rule of thumb is that you should have 20 times your desired annual spending rate. This is a conservative number and you can retire on less but conservatism helps us deal with uncertainties. I call this the required NestEgg. To calculate this just multiply the amount you want to spend each year by 20. For a $50,000 annual spend you need $1,000,000 (50,000 * 20 = 1,000,000).
Now back to your Savings %. Why is this the only number that matters? First of all it is completely under your control. You are in control of how much you spend. You decide what kind of house you live in, if you rent or buy, what kind of car you drive or if you take the bus, what kind of food you eat. If you really wanted to you could cut your spending by a lot. I don't think I have to convince anyone that you could also increase your spending by a lot...
There are two simple formulas you can think of when contemplating your retirement:
1) while you are saving your nest egg: Income - Spending = Savings
2) When you start spending your nest egg: Beginning NestEgg + Return - Spending = Ending NestEgg
The only common number in both equations is Spending. If you decrease your Spending then you increase your Savings and you decrease the required size of NestEgg needed. The great thing about decreasing Spending is that it both increases how much you are putting away and decreases the size of nest egg you need.
The following table gives an idea of approximately how long it will take you to save enough to maintain your current spending in retirement (achieve 20 times your annual income). The Investment Return is how much you earn from investing your NestEgg. The number in the table is approximately how many years it will take your NestEgg to reach 20 times your income.
| Investment Return | ||||
| 5% | 7.5% | 10% | ||
| 4% | 66 | 50 | 41 | |
| 7% | 55 | 42 | 35 | |
| Savings % | 10% | 47 | 37 | 31 |
| 15% | 39 | 31 | 26 | |
| 20% | 33 | 27 | 23 | |
So if you have a Savings % of 4% it will take you between 41 and 66 years (depending on the return you earn on your savings) to save 20 times your income. If you increase your Savings % to 10% it takes between 31 and 47 years. If you want to retire early, put away 20% starting at the age of 25 and you could retire between the ages of 48 and 58.
Many people focus on Investment Return because it has a big impact on how fast your NestEgg grows, as you can see from the table. The problem with focus is that we do not control our investment returns. We do control how much we spend, and thus how much we save.
Conclusion: If you want to retire earlier, spend less and increase your Savings Rate. Not really a surprising outcome. With the table above you can hopefully see the large impact of saving just a little bit more. Remember that the earlier you retire, the more high functioning years you will have in retirement to enjoy that NestEgg.
PORTFOLIO UPDATE (as of 2/22/2019):
Current Performance:
The ETF's and other funds that make up the portfolio's MTD Returns:
Portfolio Description:
The first is a "buy and hold" strategy that does not ever change. I call this the Equal portfolio because it is made up of four equal parts allocated to different asset classes. It is 1/4 in large cap equity (Ticker VONE), 1/4 in small cap equity (Ticker VTWO), 1/4 in investment grade debt (Ticker AGG), and 1/4 in high yield debt (Ticker JNK). The allocations never change. The only thing needed is to rebalance every so often as performance differences will cause the weights to shift.
The second portfolio is a "tactical" portfolio. It is tactical because it adjusts the weights to the four asset classes above based on market conditions. I call this the TA portfolio. It can go 100% into any one asset class or be a mixture of them. 1/12th of this portfolio can change each month as I make a monthly call on what i expect will do best over the next year based on current market conditions. Historically I have picked the best asset class about 50% of the time, the second best about 25% of the time, the third best 18% of the time and the worst 7% of the time.
The third portfolio is also a "tactical" portfolio. I call it the Enhanced portfolio because I follow the same allocation as the TA portfolio but I pick other vehicles that I expect to offer a better return than the four ETF's used in the Equal portfolio. This allows for active management and broader exposure to asset classes such as International Equities, Emerging Markets, and Commodities among others.
Current Allocations:
Current Performance:The ETF's and other funds that make up the portfolio's MTD Returns:
| Ticker | 2/22/19 |
| VONE | 3.5% |
| VTWO | 6.1% |
| JNK | 0.7% |
| AGG | -0.1% |
DBCMX | 4.1% |
| IEMG | 0.1% |
| KXI | 2.5% |
| JXI GOVT | 2.7% -0.2% |
Portfolio Description:
The first is a "buy and hold" strategy that does not ever change. I call this the Equal portfolio because it is made up of four equal parts allocated to different asset classes. It is 1/4 in large cap equity (Ticker VONE), 1/4 in small cap equity (Ticker VTWO), 1/4 in investment grade debt (Ticker AGG), and 1/4 in high yield debt (Ticker JNK). The allocations never change. The only thing needed is to rebalance every so often as performance differences will cause the weights to shift.
The second portfolio is a "tactical" portfolio. It is tactical because it adjusts the weights to the four asset classes above based on market conditions. I call this the TA portfolio. It can go 100% into any one asset class or be a mixture of them. 1/12th of this portfolio can change each month as I make a monthly call on what i expect will do best over the next year based on current market conditions. Historically I have picked the best asset class about 50% of the time, the second best about 25% of the time, the third best 18% of the time and the worst 7% of the time.
The third portfolio is also a "tactical" portfolio. I call it the Enhanced portfolio because I follow the same allocation as the TA portfolio but I pick other vehicles that I expect to offer a better return than the four ETF's used in the Equal portfolio. This allows for active management and broader exposure to asset classes such as International Equities, Emerging Markets, and Commodities among others.
Current Allocations:
DISCLAIMER:
Past performance is not a guarantee of future performance. This strategy is presented for informational purposes only and is not a solicitation to buy or sell any securities. The writer of this blog owns many (long positions only), if not all, of the securities discussed in this blog. October is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May , March, June, December, August and February. ~ Mark Twain
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