Most successful business owners struggle with determining the amount of money they will need to maintain their lifestyle throughout retirement. What’s your number?  In this brief video clip from the 2010 Oliver Stone film, Wall Street: Money Never Sleeps, Shia Labeouf (Jake Moore) asks that exact question.

Josh Brolin’s character (Bretton James) reply to the question, with a smug “more” is emotionally appealing but doesn’t represent a specific achievable goal. In effect, “more” is a way of expressing that you don’t have priorities. As the late/great John Bogle said in his 2008 book Enough, True Measures of Money, Business, and Life “We chase the false rabbits of success”.

Business owners are highly susceptible to the “more” illusion because “more” is always better, right? No, at least our brains don’t think so. Neuroscientists have found that our brains can imagine or “see” a concrete goal but can’t focus on just “more”. In his excellent, thought-provoking book Essentialism: The Disciplined Pursuit of Less, author Greg McKeown writes that essential is “less but better”.

A Better Answer

The next handful of years will witness a transition from the youngest end of the Baby Boom Generation reaching retirement age to older Gen Xers heading in that direction. There are literally thousands of books and articles on the topic of determining your number. Some writers take a reasoned view while others provide “feel good” answers that are mostly wrong. Of late, it seems the latter approach is used more often with titles that basically denote “everything is going to be ok”. Well, probably not unless you plan to make it that way.

A Simple Formula

Because this topic comes up so often in our work, we keep a whiteboard in one corner of our conference room with a highly simplified formula for determining your personal retirement number.

Here are the 4 steps:

STEP 1: Estimate honestly and accurately your annual living expenses in your first year of retirement. Next, add inflation to this initial dollar amount at the rate of 3% per year (the approximate inflation rate for the past century). This is where most investors fail. Buying power erosion won’t magically be suspended because you are in retirement. For example: If you estimate living expenses of $100,000 in year 1, Year 2 will be $103,000, Year 3, $106,090 and so on. What money is worth in the marketplace matters before retirement and after. A word of caution – don’t fall into the “when we are retired our expenses will be lower” trap. Three decades of experience tell me this usually isn’t the case at least for the initial decade or so of retirement.

STEP 2: Multiply your annual living expenses from the previous step by 20. This is a simple way to derive a 5% withdrawal rate which is likely on the extreme upper end of the “safe” withdrawal range. There are several factors that go into determining withdrawal rates but this exercise just provides a very rough “ballpark” idea for planning. For our purposes here, $100,000 per year of living expenses translates into an investment portfolio of $2 million needed at the start of retirement assuming that you maintain the majority of your assets in the global stock market. If instead you assume a 4% annual withdrawal rate, investments need to total $2.5 million at the time of retirement.

STEP 3: Determine the total value of the investment assets (including 401(k)s, IRAs, etc.) that you have now or will reliably have at the time of retirement. EXCLUDE anything that is not invested for income or appreciation in a liquid public market. That means excluding the value of your residence, your business value, farm land, and other assets UNTIL they are converted into liquid investments. Another note of caution- many retirees falsely believe they will eventually convert some of their home equity into the liquid investments category after they “downsize”. In all our years of experience, we have yet to actually see this play out; People may downsize in square footage perhaps, but not in value.

STEP 4: Subtract what you have in financial resources (Step 3) from what you need (Step 2). If there is a shortfall or gap this is what you need to make up BEFORE YOU RETIRE. That might translate into working longer, saving more, and/or spending less.

Our focus in working with clients who are planning to retire in 5-10 years is aimed at creating priorities and action steps to ensure that resources and goals are aligned. Are you on track? Do you need to make changes? Start there. Ready for a real conversation?

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