Retirement Planning With Just 3 Numbers

Piggy Bank with retirement formula
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By Robert Berger

Professionals love complications. Trust me. I'm a lawyer. I know. We love using fancy words and really long sentences. Uttering something in Latin is even better. "Nunc pro tunc" is my personal favorite because it makes me feel like a time traveler.

Retirement planning should not be so complicated. We can put away the Monte Carlo simulators and fancy calculators. We don't need a thick, smartly-bound plan from a financial adviser. In fact, all we really need to understand are these three numbers:

25. How big of a nest egg do you need for retirement? While that may seem like a complicated question, it's not. Take your anticipated annual expenses during retirement (some use their current income as a proxy), subtract your expected Social Security and pension benefits and then multiply by 25.

For example, let's assume you'll need $75,000 a year in retirement and you'll receive $25,000 a year in Social Security and pension benefits. Your nest egg needs to be $1.25 million ($50,000 x 25).

The logic behind the number 25 is simple. It assumes that a retiree can withdrawal 4 percent of his or her investments each year without substantial risk of running out of money.
Did you see what I did there? I snuck in the word "substantial" just before "risk." Yes, it's a lawyer trick designed to give us an out. But it's important. There are no guarantees here. But a 4 percent withdraw rate is a safe bet, according to the experts.

15. Saving 25 times your annual expenses is a big number. If you are decades from retirement, it's fair to ask just how much you need to save to meet this goal. The answer depends on how fast you want to get there. However, as a general rule of thumb, saving 15 percent of your income should get the job done.

If you start much later in life, you'll need to save much more. If you want to retire early, you may need to save a lot more than 15 percent. A good resource to see exactly where you stand is called "Your Money Ratios." Written by Charles Farrell, this book will give you a good idea if you are on the right track given your age, income and retirement savings.

Your age. We need to have an estimate of the returns we can expect to receive on our investments. I use 8 percent for planning purposes. So you are probably wondering why the third number isn't eight.

Here's why:

In order to earn 8 percent on average, it's critical to have the right mix of investments. Play it too "safe" with lots of fixed-income securities, and it's less likely that you can meet your retirement savings goals. On the other hand, putting everything into emerging market debt is likely to give even the most aggressive investor motion sickness.

As a good rule of thumb, you can use your age to devise a solid investment plan. Simply subtract your age from 100 and invest that percentage of your assets in equities, with the rest in bonds. For example, at 20 you would invest 80 percent in stocks and 20 percent in bonds. At age 50 it would be an even split. Some investors get a bit more aggressive and subtract their age from 120 instead of 100. That tilts the scale in favor of more equities, but is still a good rule of thumb.

Whatever choices you make, just remember that starting early is the "sine qua non," or essential ingredient, of a worry-free retirement.

Rob Berger is an attorney and founder of the popular personal finance and investing blog, He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing.

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Reverse mortgage loans can meet your retirement needs if you currently own a home. Like the name "Reverse mortgage" implies, instead of making payments to pay-off a mortgage a reverse mortgage makes payments to you. Reverse mortgage loans can provide you additional income in your retirement years which can improve you quality of life.

November 29 2013 at 9:22 AM Report abuse rate up rate down Reply
worried man

About 65 % of people get divorced so anywhere between say 40 and 50 some years old you only will have half ( if you are lucky) of whatever you saved and also from your pension

October 18 2013 at 1:05 AM Report abuse rate up rate down Reply
worried man

All the people with 1.5 million please raise your hands! Individuals with school, federal, and state pensions need not participate.

Come on raise those hands high ...I don't see any hands yet !

October 18 2013 at 12:03 AM Report abuse rate up rate down Reply

I forgot to mention that I am a huge believer in dollar cost averaging and continue to do so even in retirement.

October 17 2013 at 10:54 PM Report abuse rate up rate down Reply

I am very comfortable. I have been retired for 2 plus years and have not touched any savings yet. One calculation I did was to multiply my pension by 20 years and count that as part of my portfolio. So my million plus is there. I do believe that it is important to always live slightly below your level. I certainly don't deny myself, but I am very realistic.

October 17 2013 at 10:52 PM Report abuse rate up rate down Reply
1 reply to chaparita0728's comment

Amen to that.

October 18 2013 at 1:29 AM Report abuse rate up rate down Reply

This guy is in la la land. Most people experience a roller coaster ride through life. Many of us make good money early in our lives and buy a house, cars and have kids. Then we take a chance, perhaps starting up a business or investing in something. When that tanks we're right back at the bottom again. Then before you know it you turn 55. There's hardly anything in the bank and it's paycheck to paycheck probably for the rest of your life. Then just when things seem to level off, you get sick or your spouse does. Boom, now you go into debt and have to ask family or friends to help out. Maybe even ask your children to help out. Your cousins and other family might have money but not for you. They'd rather go on vacation than give you a couple grand which would make all the difference in the world. As your sliding further down you discover your taxes are due and you didn't pay enough in because if you did you wouldn't have enough for food and you couldn't put a roof over your head. Now the Goverment slams you with fines that could kill a horse and a pay plan that's so unreasonable you can't sleep at night. Then it happens, your wife looses her job. She's to old to find another job that pays what the last one paid and your income is hardly enough to pay the utilities. Now what?
You start going to the pay day store and begin taking out loans at 110% because at least they'll give you the money so you can keep your place and put some food on the table. Soon, you get some money but you have to pay off the pay day loan and then there's so little left you go right back and take out another pay day loan. You keep it all a secret because your terribly embarassed if anyone finds out. Your wife knows but she's to stressed to help you.
Finally if you haven't got a plan B like getting on some Goverment doal program for the needy or some type of charity program for the poor your going to end up on the streets. Does this paint a pretty picture? So as you see the brand new Bentley's, Aston Martins on the streets and the private jets landing all day long and you bike ride by 1-10 million dollar houses as if they are no big deal, you think how come I wasn't born a rocket scientist? Fact is you are never going to get ahead, you are probably barely able to scrape by and here this guy is telling you to save your money and when you reach 1.5 million you should be OK. If this is reality I have swamp land in Florida to sell you.

October 17 2013 at 10:15 PM Report abuse +1 rate up rate down Reply
N Loves Sharon

So you are saying most Americans need 1.5 Million dollars to retire comfortably. What are you DELUSIONAL. What planet do you live on? 90% of Americans have less than $100,000 in savings if that.

October 17 2013 at 8:25 PM Report abuse +2 rate up rate down Reply
2 replies to N Loves Sharon's comment
worried man

But they may have a great pension...could be

October 18 2013 at 1:01 AM Report abuse rate up rate down Reply

A lot of people do not know how the stock market works and do not save and invest. I have invested in the market since 1980 and have done very well and am retired 2 1/2 years now and have not touched any of my retirement. No, I was not a big wheel. We did not live above our means.

October 18 2013 at 1:31 AM Report abuse rate up rate down Reply
Raymond Schiflett

An 8% return on my investments annually...average??/ Really?? How do you figure that when CDs are paying around 1%, bonds are all down about 6% and the stock market as nearing the end of its record bull run??? If you can guarantee that return, then I have some money for you Mr Madoff.

October 17 2013 at 6:17 PM Report abuse rate up rate down Reply
2 replies to Raymond Schiflett's comment
worried man

He is planning an passing on all the principal to his heirs. He is probably going through some brokerage house. Little does he know that they will take all his money before he dies

October 18 2013 at 1:03 AM Report abuse rate up rate down Reply

I have done better than 8% in the market this year

October 18 2013 at 1:32 AM Report abuse rate up rate down Reply
1 reply to classof68gto's comment

"this year"..............

October 18 2013 at 5:42 PM Report abuse rate up rate down

The three number calculations are nice but the bottom line is that you have to do the hard word. Start retirement planning and saving/investing early in life. Take advantage of any employer matching plan, avoid unnecessary risks with retirement funds and plan for multiple streams of income once retired (social security, pensions, dividends, rental income, part time work, etc.) There is a great deal of information about retirement available on the web. I recently found the site Retirement And Good Living that provides information on finances, health, retirement locations, part time work and also has a great blog of guest posts about a variety of retirement topics. I never understand why more people don't at least try to educate themselves on these sites. Most are free.

October 17 2013 at 6:43 AM Report abuse +1 rate up rate down Reply
1 reply to j79xjames's comment

While starting early is best, sometimes ( this is my personal experience) something comes along mid-life that wipes out that savings. Something like an illness where the co-pays hit hard. Somewhere along the line, there has to be a way to do a plan B too.

October 17 2013 at 3:09 PM Report abuse rate up rate down Reply