## The Surprisingly Simple Math Behind Retirement

For all the fancy spreadsheets, pretty charts, and insider jargon financial planners use, the math behind retirement is surprisingly simple. That, however, is not the way most professionals would like you to think of it. Most professionals (in any industry – not just financial) want you to think that they are the expert and that you won’t be able to solve your own problem. Optimizers are do-it-yourselfers. We’re not scared of a problem; we thrive on solving problems, ourselves! Luckily, the problem you need to solve for retirement is pretty simple.

## You Spend How Much?

The first thing you need to figure out is how much you’ll spend in retirement. You know how much you spend now, right? Ok, maybe you don’t track your spending with a fancy free software like me. You don’t have to. You simply need to track your spending for a month and you’ll get a good idea of your spending. A lot of people have trouble tracking their exact spending because they’ll withdraw cash and the cash disappears. Or, maybe they just don’t want to look at how much they’re spending because it’s scary.

The numbers I hear from most people is that they’ll spend somewhere between \$25,000 and \$100,000 a year in retirement. They come to this conclusion based on some forecasting. This is a big range. Folks that have a paid off mortgage and low overhead may be able get by on \$25,000. Other folks that may have a mortgage and a taste for fancy restaurants will need more than that.

## Surprisingly Simple Math

The next step to figure out if you’ll be able to retire is to know if your nest egg is big enough. Some people call this your “number” or your “stash.” In reality, this number is your net worth, excluding your primary residence. Now here’s where the surprising simple math behind retirement comes in. You simply multiple the annual amount you expect to spend in retirement by between 10 and 25. That’s it. That’s how much you need to retire.

The multiplier that you choose depends on several different factors. If you’re 65 years old and plan to pull Social Security soon, you may only need to multiply by 10. On the other hand, if you’re 40 years old and plan to be in retirement for half your life, you’ll need to multiply by 25. Pete Adeney has a great article on this for all you early retirement types out there.

Let’s say you’re 50 years old and want to figure out how much money is enough to retire. You plan to spend \$35,000 per year in retirement. You also choose to use the 25 multiplier to be on the safe side. You will need \$875,000 to live off of your portfolio for the rest of your life. Now you could drop the multiplier to 20 in this case since you could also assume Social Security would kick in for this hypothetical 50 year old. A 20 multiplier would translate into a nest egg needed of \$700,000.