Developing our goal
One of the best things you can do to successfully save for retirement is to write down your goals and continually re-evaluate and reassess those goals and your plan. This blog is one of the ways I hope to keep track of my goals and their progress.
We estimate that we can live off of $55,000/yr in retirement, about $3,500 per month after taxes. That number was calculated by taking our current monthly spending and eliminating the mortgage and childcare payments. An additional 15% was also added for healthcare costs.
Beware of the math below.
Ideally, I would like to only withdraw 3% in retirement; I want a little bit of cushion from the 4% rule, but that’s just me.
The 4% rule of thumb says that you can withdraw 4% of a portfolio and have a strong likelihood that it lasts 30 years
Using some basic math, I calculated that the amount I would need for a 3% withdrawal to equal $55,000 is $1,830,000. That is to say, I need a portfolio of $1,830,000 for a 3% withdrawal to provide $55,000 in annual income.
$55,000/0.03 = $1,830,000
We also want a family vacation budget. We’d like to be able to rent a beach house out for a week, every year and have our entire family come. We would cover all of the expenses. We would like to budget $27,000 per year to cover that expense (we hope we have a big family).
$27,000 per year with a 3% withdrawal is an additional $900,000 needed, bringing the total to $2,730,000.
$27,000/0.03 = $900,000
But that’s not enough. We also want to spend time, just the two of us, taking a lot of trips and cruises. 1 trip per month on top of the family beach trip is our goal. Based on how we want to vacation, we need $27,000 per year to cover those expenses. But we know that those expenses will decrease over time, as we get older and vacationing gets harder on our tired, old bodies.
$27,000/yr with a 3% withdrawal is another $900,000, bringing our total “magic number” to $3,630,000 (AHHH!!!)
When I saw that number for the first time, I thought about giving up. $3.6 million is such a crazy goal. How can we ever expect to reach that, especially when we have been terrible about saving so far?
How can we get there?
To get to that amount (with our retirement accounts) it would take decades of solid market growth and maximizing both IRAs and the 401k. Based on a 7% real rate of return*, we should cross that $3.6mil in around 26 years. So that shows that it is possible, from this point, to reach that goal. Unfortunately, it will take 26 consecutive years of:
- 401k maximized every year [$18,500] (never done)
- My Roth IRA maximized [$5,500] (done twice)
- Wife’s Roth IRA maximized [$5,500] (done once)
If our past is the best predictor of the future, I wouldn’t give us great odds of completing that goal. But we do have a lot of unknowns that could work heavily into our favor. Plus, we have found motivation that has not existed before.
We are planning on the worst and hoping to be surprised with a few things here and there to lower that daunting $3.6mil figure into something a tiny bit more manageable. And, mentally, breaking it down to smaller step goals makes it seem a little bit easier. In the next post, I will break my goals down into some that are more manageable. I will also explore some of the other ways the $3.6M figure may not actually be our “magic number”. One goal that won’t change is the day for us to reach $1,000,000. Only 4,367 short days to go.
*Real Rate of Return is the total return of an investment after subtracting inflation.