— 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 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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