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How much do you need to retire?
Legal Disclosure: Tony Robbins is the Chief of Investor Psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA) with wealth managers serving all 50 states. Mr. Robbins receives compensation for serving in this capacity based on increased business derived by Creative Planning from his services. Accordingly, Mr. Robbins has a financial incentive to refer investors to Creative Planning.
Much like stepping on a scale after the holidays, the amount of money you’ll need to comfortably retire is the number many Americans aren’t sure they want to know. In fact, nearly half of Americans haven’t even tried to calculate how much money they’ll need to retire – including a whopping 46% of all financial planners. However, just like those extra pounds, ignoring the problem won’t make it go away. You can’t manage your health if you can’t measure it. And the same goes for your finances. You can’t reach your financial dreams unless you know precisely how much it will take to get there.
Time to get your head out of the sand and do some easy number crunching to find out where you are and where you need to be. Remember this: anticipation is the ultimate power. Losers react; leaders anticipate.
By now you should know that failing to plan and just hoping Social Security will carry you through retirement is a recipe for disaster. Although the Social Security Act eased the suffering of millions of Americans during a time of crisis, it was never intended to become a replacement for retirement savings.
Fifty years ago, the average retirement was 12 years. Someone retiring today at age 65 is expected to live to 85 or longer. Twenty-plus years of retirement has become average, meaning many of you will live much longer. Furthermore, 52% of American households are “at risk” for not having enough money in retirement to maintain their living standards, according to the Center for Retirement Research.
So how can you plan on how much money you’ll need when you don’t know how long you’ll live?
You MUST build a money machine, harnessing the power of compounding to create an income stream for the rest of your lifetime. In other words, you must automate your savings in a tax efficient manner and utilize an investment strategy that will keep earning in any season.
Grow your savings to a point at which the interest from your investments will generate enough income to support your lifestyle without having to work. Eventually you reach a “tipping point” at which your savings will hit a critical mass. This simply means that you don’t have to work anymore – unless you choose to – because the interest and growth being generated by your account give you the income you need for your life. This is the pinnacle we are climbing toward.
What is the ‘magic’ number?
So what is that mountain top number for you? Well, really there is not just one “magic number,” but five different levels of financial dreams that will set you free. However, for simplicity’s sake, today we’re just going to focus on the number you would need to maintain the same lifestyle you have today for the rest of your life, without having to work – what we call financial independence.
To find this number, you first need to calculate how much money it takes to maintain your current lifestyle. To clarify, this is not how much you earn, but how much you spend. So if you spend more than you make (first of all, stop that practice) then you’d use the number you actually spend. If you make $100,000 but live off of $80,000, then this number would be $80,000.
Next you’re going to multiple this number by twenty. This simple calculation will give you a rough idea of how much you will need to maintain your lifestyle through retirement.
Many financial planners will tell you to multiply your annual income by 10, or even 15. But today, with such low returns on safe investments, that’s not realistic. Remember, on the way up the mountain (the accumulation phase), you might put your investments in an aggressive portfolio, but on the way back down the mountain you will want your investments in a less volatile environment, whereby naturallly you would likely get smaller returns. So it might be smarter to use 5% as a more conservative assumption. Ten times your income assumes a 10% return. Twenty times your income assumes a 5% return.
What is your number? Is it less than you thought? Many people are astonished to find that their number is far less than they had imagined. Remember, clarity is power. So, now that you know your number, get there faster with these five practical strategies.
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