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What’s Your Number?


What's your number: Figuring out how much you would need to stop working and live off of indefinitely is a useful financial exercise.– What’s your number?

– Excuse me?

– The amount of money you would need to be able to walk away from it all and just live happily-ever-after. See, I find that everyone has a number and it’s usually an exact number, so what is yours?

That’s a quote from the movie Wall Street: Money Never Sleeps, the 2010 sequel to 1987’s classic tale of American greed. Long live oversized cell phones!

So, today, I’m curious: What’s your number? (I share mine below.)

If you’ve never stopped to consider what your number might be, it’s a useful exercise. Whether or not you ever want to stop working, your “number” is the amount of money that would allow you to quit working a job five days a week because you need to.

Your number is the amount of money that, when appropriately invested, would provide enough return each year to finance your chosen lifestyle indefinitely.

Although how much income you can draw from your investments will vary by market conditions, many planners assume 4 percent is a safe estimate. For example, if you have $1.5 million, you could withdraw 4 percent a year and have $60,000 of income.

Our numbers are driven by a number of things:

  • Our minimum necessities, like food, shelter, and healthcare
  • Our liabilities
  • Our desired lifestyles

Whereas you might be content to trade extras like a car, new technologies, and annual vacations for a smaller number (and achieving financial freedom sooner), I may want to afford a few (or many) luxuries down the road.

Our numbers represent freedom: the freedom from needing to trade time for income.

For us 20- and 30-somethings, talking about saving for “retirement” in 30 or 40 years is hard to get excited about. Although seeing many in our parents’ generations unable to retire at 65 or even 75 may be motivation to save, we’re also realizing that we may have a lot of vitality left at that age – and perhaps even a desire to keep working.

That’s why I like saving for “my number” rather than for retirement. Because when you hit your number, you become truly financially independent – able to live off of the proceeds of your investments and nothing else.

Here’s another example: Have you ever heard of the 30-something retiree? They’re out there. Aside from some lucky entrepreneurs, most 30-something retirees picked an achievable number and hit it. These are people who have been saving since they were in diapers and then busted their asses at work while renting out every square inch of their homes to get the extra income. To average Joes like you and me, these people are annoying as hell. But they’re having the last laugh.

They may have lived a spartan lifestyle for over a decade, but now they don’t have to work. Everything is a trade-off.

My number

My number is $3.75 million.

That would provide $150,000 in annual income at 4 percent annual returns.

That’s a good income. Of course, my family could comfortably live on about half of my number (somewhere between $1.5 and $2 million). But it would afford less flexibility and make us more vulnerable to rough patches in the market.

What about you? What’s your number – and why? Leave your answer in a comment.

(Hint: To use my example of an income based on 4 percent annual returns, simply take your desired annual income and multiply by 25. For example, a $60,000 annual income x 25 = $1.5 million.)

Note: My example (and this formula) is simplified because it doesn’t account for inflation, so please treat it as an estimate only. The younger you decide to live off of your savings, the more inflation will erode the value of your annual income, meaning you may want to adjust your number to provide 3 percent annual “raises.” This fact — along with the uncertainty of investment returns — are good reasons to meet with a professional financial planner to help determine your exact number and your strategies for getting there.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. My personal number is $1.5 million.
    For my partner and I, we’d need $2.5 million.

    That would keep us at ‘just above’ our current level of income.

    We’re currently debt free and at step 4 in your plan. Though as long as our number would take to reach normally (over 90 years, given that we’re saving about $2,275/month), I think it’s time to look at step 6.5!

  2. My number is 1.625 million in 2009 dollars, so the total is a bit higher now. I like to assume a withdrawal rate of less than 3% with the rest remaining in the account to fight the losing battle against inflation. This will be a decrease in my gross income, however I don’t need to be saving 30% of my gross income and I shouldn’t have 10% of my gross in student debt payments.

    The way I see it, this is a very reachable goal, and I have a feeling that I won’t quit when I get there, but will feel free to do so whenever I please.

  3. How about just $40K so I can start at zero and go from there?

  4. Good article, but even in today’s challenging interest rate world, you could do better than 4%. Annuities are one option, but I prefer investment vehicles which offer a rate of return and capital preservation. Investment grade corporate bonds yield about 5.5% to 6%, if selected wisely right now. Plus, you get your original investment back when they mature. Bonds also allow one to ladder maturity dates, so that as rates rise in the future, one can take advantage.

    That means you would only need about $3 million (at 5.5% = $165,000).

    • You bring up a good point that there are options that return better rates, but remember that as rate of return goes up, either one must trade liquidity, either through term length or contracted surrender periods, or one must introduce more variance into the returns. In theory, 5.5% is attainable in the long run, but timing of returns really matters, especially when withdrawing funds, so limiting exposure will be a key concern during a non-working retirement period.

      But in the end, your point is valid, depending on the rate assumptions one may need more or less money to hit their income goal and battle inflation during their retired period. Here is to hoping we can meet ours!

    • When most people recommend the 4% withdrawl rate, they are assuming a conservative rate of return of 7% with 3% inflation. (7% – 3% = 4%)

      I wouldn’t say those bonds are a bad idea, but if that’s all you invested in you wouldn’t be able to withdraw 4% indefinitely with that strategy.

  5. 1.75 million would buy enough quality rental property to provide a $100,000 annual cashflow stream.

  6. My Number is 1 Million $. I have kept an allowance for unforseen and a cussion for congtegnet & diversified planning. 1 Million seem good in country like Pakistan where state governed interest rate during rate last five years have been from 10% to 13%.

  7. Great article! I heard of the “my number” discussion before, but never the breakdown behind it. My question is does this calculation take into account taxes? I ask, because TSP accounts don’t let you withdraw until a certain age (57 1/2) without penalty. Upon withdrawal, your still subject to taxes on your withdrawal amount.

    • Yes, you are calculating a pre-tax income figure with the 3-4% assumption, and then you would pay taxes depending on your country of residence. In the US I believe capital gains tax is paid on realized investment income, and is less than standard income taxes at this point. It is possible to have a variety of investment vehicles, some tax deferred, and then choose which money to withdraw based on tax regulations at the time of withdrawal. But a financial planner and tax professional would be needed to give specific advice about this.

  8. My number is $1M.

    In a developing country like Ghana, 6% to 10% reruns are common on safe and Government securities.

    Given the relatively lower cost of living, an annual income of $80,000 (at 8% return) would allow me (and my family) to live like a king.

  9. Wouldn’t it make more sense to determine “the number” than would produce an annuity sufficient to generate the income you want from the age of retirement to say, age 100? (Unless you want to leave 100% of the principal behind and be exceedingly generous to your children or charities.)

    In other words, if you want to leave an inheritance of $500,000, and you want an income of $60,000 per year for 45 years (aged 50 – 95), you don’t need $1.5 million, because the excess principal can contribute to the annual income.

  10. JENE PITSENBARGER says:

    one dollar and a lifetime of healthcare? can’t beat that

  11. $2.5M for me…

  12. My number is $5.5 million. I figure I will want to keep up the life style I have at the point when I retire. So, my number is based off of what is the current avg. salary of my profession after 30 years of service. Current projections for my 401(k) are something like $3.5 million, so my IRA contributions will have to supplement.

  13. I think an interesting way to look at this notion of “your number” is to instead look at it as “your number at a specific age”. By looking at your number in relation to your age you can determine how much of your total wealth you would have to sacrifice to live your ideal work-free lifestyle during your retirement. For instance, if my ideal retirement age was 30 years old and I wanted to live off of $150,000 a year for the next 30 years while maintaining my overall wealth (in terms of purchasing power) my number would have to be around 15 million dollars at age 30 (at a 4% annual rate of return factoring in a 3% annual inflation rate). If you want to calculate this for yourself you can try this calculator (http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php). It lets you factor in negative monthly deposits (withdrawals). Just subtract your expected annual rate of inflation from your expected annual rate of return and you’ll be able to see how much wealth you will loose over the course of your retirement. Feel free to chime in if you see a mistake in my methodology.

    P.S. I am in no way affiliated with the calculator site.

  14. I feel greedy because my number is $10 million. But, I take into account inflation with that number. We are fairly young, want a family and want to travel while still maintaining our current lifestyles. At the end of the day, taking into account inflation, that number is $10 million.

  15. David E. Weliver says:

    To clarify for a couple who have asked, this is overly simple by design — it does not account for inflation, taxes, or timeline (the age at which you’ll start living off your investments and the age you expect to die).

    But when you account that you’ll need more money to account for inflation and a bit less because you can draw on the principal as you near death, it’s not a bad estimate. My hope is that people who aren’t necessarily inspired to run a complex retirement calculator (or meet with a planner) could use this to get a quick idea of their number.

  16. Assuming I live until 90, 3% inflation, and 6% returns annually, I would say for me to leave it all behind, it would have to be $8 million with the lifestyle we’d want. Would probably draw it down in stages, say at 1.5% for the first couple of years, then 2%, then 3% about 10 years from now. We’re young, want a family, so we wouldn’t need all of it right away, we would definitely grow into it.

    It would be nice to have that, but I’m not sure I’d know what to do with myself not having to work for 60+ years. That’s a whole lot of volunteer work.

  17. The “real” number that accounts for inflation and taxes and everything is kept track of in a spreadsheet, but i like to also have a “right now” number that ignores taxes and everything else and is based off of my current expenses. If i had $750k right now, i could pretty much live on that. It would have to be more than that to cover taxes, and id probably work pay time which would save me from inflation, but 4% of that covers my expenses plus a little extra.

  18. My number is higher because I look at it like I would be living a 7 day weekend and currently I don’t spend very much money at all during the week. Things like Happy Hours, Eating out with friends, playing golf and traveling more often would need to help fill in for the social lasses I would lose from not working. I think I could easily get by on $1M but that would mean sitting around doing nothing and that’s not how my life would work. Thus my actual number is probably somewhere around $9M.

  19. 20 rental units. That’s my number. Working on getting there in the next 15 years. Added my first 2 units about 2 months ago. Cash flowing a little more than 800/mo on them. If I can get even 3/4 of that for everything else. I will be perfectly happy managing those. I never want to fully retire, but making my own hours and pursuing something I have great interest in is a great aspiration of mine.

  20. “More”