If you want to free yourself, once and for all, from your dependence on your paycheck, there are four numbers you must know.
After you’ve discovered the first number we discussed in the last episode, i.e. how dependent you are on your Retirement Bucket™ of Investments each year, you have three more to go, so let’s tackle them today!
#2: How Long Does Your Retirement Bucket Have to Last?
The second number you must know is how long your Retirement Bucket™ needs to last.
That may sound like a very morbid question, but there’s a very big difference if you’re asking your Retirement Bucket to last 15 years vs. 30 years, so you must know your number to arrive at an accurate answer to your biggest question, i.e. do we have enough built up to stop working if we choose to?
Most people grossly underestimate how long they’re going to live, so let’s take a look at the IRS Joint Life Expectancy Table which provides the average age at which the surviving spouse in a couple passes away:
- 60-Year Old Couple: 30.9 years (to age 90.9)
- 70-Year Old Couple: 21.8 years (to age 91.8)
- 80-Year Old Couple: 13.8 years (to age 93.8)
If you are a 60-year old couple, on average, one of you will live to age 91 so that is how long you must plan for. No small task!
#3: What Rate of Inflation Will You Assume?
The third number you must be 100% clear on is the rate of inflation you will assume because of the enormous influence it has over your purchasing power.
Life is expensive and it keeps getting more expensive!
Even if we only use the average historical rate of inflation of 3% per year, if your ideal lifestyle costs $10,000 per month right now, here’s how much you will need in the future to support the same lifestyle:
- 10 Years: $13,000 per month
- 20 years: $17,500 per month
- 30 years: $23,500 per month
$23,500 per month during the final year of your joint life expectancy! The key distinction is that this is not to support a better lifestyle. This is to support your exact same lifestyle you enjoy today.
#4: How Much is Inside Your Retirement Bucket™?
The fourth number you must know to determine if you have enough built up and how much you can afford to spend without running out is how much you’ve accumulated in liquid investments, i.e. your Retirement Bucket™.
It’s unlikely you will sell your home and/or cars to support your lifestyle, so let’s not count those right now.
The key distinction to make is how much of your Retirement Bucket his held inside vs. outside of IRAs and 401(k)s.
The reason why this is critically important is that funds held inside your IRA, 401(k), or 403(b) if you happen to work for a non-profit organization, are actually worth less to you when you withdraw funds to support your lifestyle because you have to pay more income taxes on everything you withdraw.
So, you must know the bottom line amount you hold in your Retirement Bucket, and the percentage of that total held inside vs. outside of IRAs and 401(k)s.
With these numbers in hand, you are now way ahead of the curve and on the way to finding accurate answers to your three big questions:
- “Do we have enough built up in our Retirement Bucket of Investments to stop working if we choose to?”
- “How much can we afford to spend without running out?”
- “How do we manage our Retirement Bucket to make it last?”