Retirement Plan Life Hack By The Numbers

Written by: Allie Schmidt, CFP ®, CPA, Financial Advisor

Below are the basic concepts to help you answer the burning question most investors have: “Am I on track?”.  Grab a scratch paper, calculator, and maybe an Oasis Brewery Mirage IPA, and you’ve got a pretty reasonable approach to that question. Here are the numbers to look at to see if you’re on track for a comfortable retirement:

4%*: The withdrawal rate on a portfolio that is considered “safe”.  A portfolio worth $1 million dollars, should generally be able to provide a consistent income of $40,000 each year.  The idea is that the portfolio will stay intact and provide this income stream during your retirement years.  There are certainly circumstances where 4% is too high or too low for a portfolio depending on investment allocation, but it’s a very good place to start.

72:  Commonly known as the Rule of 72, this is a simple math trick that tells you how many years it will take for your money to double when invested at a certain rate of return.  You simply divide 72 by the rate of return and the result is the amount of years it will take for that investment to double.  For example, at a 8% average rate of return, it would take 9 years for your money to double.  This calculation illustrates the power of compound interest and the importance of investing early and often.

10x: Fidelity Investments each year puts out a retirement savings guideline, which most recently suggested savers need to accumulate 10 times their salary at age 67 in order to retire.  The research also suggests savings targets along the way to help you measure if you’re on track, as follows:

1x, age 30

2x, age 35

3x, age 40

4x, age 45

6x, age 50

7x, age 55

8x, age 60

10x, age 67

So if you make $75,000 at age 30, you should have $75,000 in savings. If you make $100,000 at age 35, you should have $200,000 in savings, and so on.

79^: Life expectancy in the US.  AKA, how long your money needs to last!  However, around here, maybe tack on a few extra years—Coloradoans tend to live longer than the average American.  According to an NBC News study published in 2014, if you’re fortunate enough to live in central Colorado’s ski country, life expectancy is the longest at 87 years. At HD Wealth Strategies, we’re running our financial plans out to age 95…no one wants to run out of money.

Everyone’s situation is different and this is not intended to be financial planning or retirement advice.  Rules of Thumb are great; however, at the end of the day, dialing in your specific financial plan is the best way to know if you are on track to meet your goals or if you need to readjust.

For more articles written by Allie Schmidt and the HD Wealth Strategies team, check out our blog at www.hdwscolorado.com/blog.

*According to the New York Times, the four percent rule was created by Bill Bengen in 1994 using historical data on stock and bond returns over 30 years since 1926.

^  According to worldbank.org

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing. The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through HD Wealth Strategies, a registered investment advisor and separate entity from LPL Financial.