What’s My Number? Go For Choices, Not Rules

Real Life Example: “I was talking with my buddy and he said his number was $X and asked me if I knew what my number was. What’s my number?” (For clarity, the expression ‘My Number’ means, ‘how much do I need to have saved or invested in order to retire?’)

I have no idea.

Your number is a function of you. Your life, your family, your values, what you care about, what you want to do, maybe what you don’t want to do.

But I really want a rule of thumb.

A Couple Rules of Thumb

Income Ratios

No kidding, I received an email just today that said if I had 10x my income saved by age 67, I’d be good. It was that simple.

You can find a more robust version of this concept – your capital to income ratio – in Charles Farrell’s Your Money Ratios. It’s the ratio of your retirement stash (excluding property) divided by your current income, or the last four years of your income. He suggests that a ratio of 12 at age 65 will allow you to retire on 60% of your income (plus social security). You ratio should be about 2.4 by age 40 to get there.

Living Expense Ratios (e.g., the 4% rule)

These ratios look at it from the expense – not income – point of view. For example, the 4% rule suggests that you can spend 4% of your portfolio each year through to the end of your life. So if you spend $75,000 per year, you need to start with a nest egg of $1.875M.

Why Rules Don’t Work

The catch with rules of thumb is that they’re ratios based on who you are, not necessarily who you want to be. Maybe you…..
  • ...would like to change your job and be a National Parks Forester or a Letter Carrier, something with a lot of walking
  • ...enjoy driving pricier cars like this one and want to keep that up through age 90
  • ...plan to move to Costa Rica as soon as possible, because surfing is important

Your choices and goals may drive a different lifestyle – a different level of spending – from your current life.

So if you’re 40, I’m sure you’ve got all those goals completely locked in, right? You know exactly what you want over the next ten to thirty years, right? Sure you do (well maybe you do, I myself do not and I’m past 40).

Instead of Rules, Go For Choices

Try this: think about a simple relationship instead of ratios and rules. The relationship between your unearned income (from savings, investments, assets like rental property or a business) and your living expenses. See the green line and the red line below, respectively.

When the green line rises past the red line, you’re entering a world of choices and options. If the income from your savings, investments, etc is covering your expenses, then you can put your creative and competitive energy into a different job, toys or hobbies, or a life goal to do something different, somewhere different.

Everyone’s chart lines are different, and everyone’s lines are a product of what’s important to them.

So what’s important to you and how do your lines look?