Retirement 101: Estimating Your Retirement Number
Table of Contents
 Before we begin
 The who and the what
 What is retirement, anyway?
 Estimating your retirement number
 Chchchchchaaaanges
 We need to talk... about investing
 Asset allocation and risk tolerance
 Setting up your portfolio
 Making it work
 COMING SOON  Keep on keeping on
 COMING SOON  What if something goes wrong?
 COMING SOON  The nonmonetary side of retirement
 COMING SOON  OK, I've retired. Now what?
Before we move on to the next step, did you write out your answers to the last one? If not, take 5 minutes and do that right now. Yes, right now.
You can read thousands of pages of information about making a retirement plan, but if you aren’t taking action, none of it will do you any good.
Now that you have a relatively clear image of what your lifestyle will be like, it’s time to incorporate how much you spend on your current lifestyle. The best way to get an accurate understanding of your current expenses is by doing a full threemonth (or more!) linebyline expense review. But that is a daunting task that often puts people off so much that they simply stop working on their plan at all. So we’ll start out with a faster method–though a bit less accurate–to ease into things and make it all a bit less overwhelming. Later on, we’ll refine your retirement number a bit more, including adjusting for those lifestyle changes that you came up with last time. By the end, you should have a solid grasp of how much you’ll need to retire, and a thorough understanding of how you got to that amount.
The quick and dirty estimate of yearly expenses
As I said, this won’t give you the most accurate results, but it should give you a reasonable ballpark figure for your retirement number–assuming no major lifestyle changes. It’s fast, and it will give you a good reference point moving forward.
You just need two numbers: your yearly income, and your yearly deposits to retirement accounts.
 Subtract your yearly retirement savings from your total yearly income. (Because you won’t continue making contributions to your retirement fund after you’ve retired!)
 (If you have a significant amount going to nonretirement savings, you’ll have to decide if that’s something you need to include or not. If it’s saving for a house, will that amount then turn into mortgage payments that you will still be making in retirement? Then include it as part of your expenses. If it’s for your kid’s college education and you won’t be needing it anymore during retirement, go ahead and subtract it. You won’t need to include that in your retirement expenses.)
 The result should be a very rough estimate for your yearly expenses.
Now we’ll use this to estimate your retirement number. At this point, we’re assuming that your retirement expenses will be very similar to your current expenses. We don’t need to account for inflation; we’ll do that in our investment calculations. And we’ll account for lifestyle changes, Social Security, Medical expenses, etc. when we refine our numbers in the next part of the series.
To get your rough “Quick and Dirty” retirement number:
 Take your yearly expense number and multiply it by 25.
 So, if you spend $80,000 per year, your retirement number is $2 million.
Why 25x?
Where does the “25” come from? It’s based on that 4% safe withdrawal rate we defined, earlier. If you have 25 times your yearly expenses, your yearly expenses will be 4% of that total.
Great, now what do I do with my retirement number?
Make plans! Your retirement number helps you know how close you are to retirement, and how much more you’ll need to save to get there.
You can plan from two different perspectives. It might make sense to explore both, and then choose the one that seems best for you.
Perspective one:
Classic retirement age.
In this scenario, you plan on retiring at standard retirement age of 65, or 67, or whatever general midsixties to early seventies age seems appropriate to you. Then, you use a compoundinterest calculator to figure out how much you’ll need to invest each month between now and then in order to hit your number on time.
Alice
Alice is 45. She wants to retire at age 65. Her retirement number is $1.5 million. She currently has $330,000 in her retirement accounts. In order to hit $1.5 million, she needs to add $470 per month to her retirement account.
Perspective two:
Savingsrate based retirement age.
In this scenario, you start by defining how much you will be able to save towards retirement each month. Then, using a compound interest calculator, you figure out how long it will take you to hit your retirement number.
Bjorn
Bjorn is 33. His retirement number is $1.3 million. He currently has 125,000 in his retirement accounts, and he has decided that going forward, he can put aside $800 every month for retirement. If he continues at this rate, he will hit his $1.3 million retirement number in about 25 and a half years, when he is 58 years old.
I like to combine these methods. First, I’ll run the classic retirement age scenario. That will help be define the minimum monthly savings rate that would allow me to retire “on time.” Then, if I have the ability to save more than that every month, I run the second scenario based on the maximum monthly savings that I can realistically afford. Like this:
Charlize
Charlize is 35. Her retirement number is $2 million. She currently has $185,000 in her retirement accounts. In order to retire at age 65, she will need to invest an additional $550 per month. But Charlize knows that she can afford to save more than that every month. She decides that she can invest up to $1800 per month. Based on that, she will hit her retirement number when she is 58. That cuts 7 years off of her time to retire!
Now she has to choose: Is not having to do an additional seven year of work worth the increased monthly investment? Or maybe there’s a compromise point somewhere in the middle that will work best?
Eventually, Charlize decides on a compromise: She will invest $1300 per month and plan on retiring at age 60. That still gives her an extra 5 years ahead of traditional retirement age, but by cutting back her monthly investments from the initial $1800 plan, she gets to have the additional $500 spending buffer per month.
Sharpeyed readers may notice that Charlize’s extra $500 “buffer” is potentially an increase to her expenses. If she gets used to spending it all every month, it’s not likely that she’ll suddenly stop spending it when she retires. It’s called “lifestyle creep“. Once you get used to a given level of spending, it becomes extremely difficult to cut back in any significant way.
In this case, Charlize will need to increase her retirement number a bit so that she’ll still have enough to cover that additional $500/mo spending in retirement. That could increase her time to retirement by about a year. That being said, I don’t want you to get too caught up in figuring out all these little details, yet. One year earlier or later for retirement isn’t going to make or break most situations. It’s better to get a solid grasp on the broad strokes of what’s going on. We’ll start working toward optimizing the balance between spending and savings once we have something to optimize!
Today’s task:

Calculate your “quick and dirty” retirement number.

Figure out how much you need to invest each month between now and age 65 in order to hit your retirement number on time. This is your minimum savings rate.

Post something you learned from this on the Facebook group. Use whatever level of detail your comfortable with. Something like “I just found out I need to save $200 more per month than I currently save.” OR “If I keep going at my current savings rate, I should be able to retire in 25 years.”

BONUS TASK: Figure out how much over and above that minimum savings rate you could invest each month. Then, calculate how much more you’d have at retirement age if you still retired at 65.
If you’re not sure how to do the math for the above, I put together a very simple compound interest calculator you can use: https://wildpotential.com/compoundinterestcalculator/
 Put your current retirement savings in the first box
 Put a guess as to how much you’ll need to save per month in the second box. (Start with 500, if you’re not sure.)
 Set the interest rate in the third box to 7%
 Set the number of years to however many years you have until you’re 65.
 Click the “Calculate” button. If the resulting total amount is not your retirement number, change your monthly contribution amount and calculate again. Keep adjusting and recalculating until you get a total amount that is close to your retirement number.