by As a personal finance enthusiast, I’m always on the lookout for solid advice to help my family and me achieve our financial goals. One of my favorite blogs to read is Financial Samurai. Sam’s insights often challenge my thinking and help shape our investment strategy. However, a recent recommendation caught my eye, and I couldn’t help but disagree. Let me explain why and share a perspective that might just change how you view your retirement planning.
“Finally, instead of an income target, you guys can also consider a net worth target to achieve before both of you leave the workforce. My recommended net worth target is 20X gross household income.”
Financial Samurai
The 20X Income Rule: A Well-Intentioned Misstep?
In a post about achieving early retirement for couples, Financial Samurai suggested aiming for a net worth target of 20 times your gross household income before leaving the workforce. While I appreciate Sam’s cautious approach, I believe this advice might actually deter many people from retiring early—and unnecessarily so.
Here’s why: this rule, like many traditional retirement planning guidelines, focuses on income rather than spending. And that’s where the problem lies.
Income vs. Spending: The Real Retirement Equation
Let’s consider a hypothetical couple, Juan and Mary. They earn a combined $175,000 annually but live comfortably on $55,000. Using the 20X rule, they’d need to amass a whopping $3.5 million before considering retirement. That’s a daunting figure that could keep them working well into their 60s or beyond.
But here’s the kicker: if Juan and Mary only need $55,000 a year to maintain their lifestyle, do they really need such a massive nest egg?
A More Realistic Approach: The 25X Spending Rule
Enter the FIRE (Financial Independence, Retire Early) community’s preferred method: save 25 times your annual spending. For Juan and Mary, this translates to a much more achievable $1.375 million ($55,000 x 25).
Even if we factor in an extra $500,000 for a house, we’re still well below the $3.5 million suggested by the 20X income rule. This approach aligns much more closely with reality, especially for those of us who’ve cultivated high savings rates.
Finding Your Magic Number
So, how do you find your retirement “magic number”? Here’s my advice:
- Track your spending meticulously for several months.
- Identify your annual expenses, factoring in potential lifestyle changes in retirement.
- Multiply this figure by 25 (for a 4% withdrawal rate) or 33 (for a more conservative 3% rate).
This method provides a much more personalized and realistic target, tailored to your actual needs rather than an arbitrary income multiple.
The Power of Personal Finance Knowledge
Understanding these nuances in retirement planning has been game-changing for my family. It’s shifted our perspective from a seemingly unreachable goal to an achievable target that aligns with our actual needs and lifestyle.
Remember, personal finance is just that—personal. While rules of thumb can be helpful starting points, they should never override your individual circumstances and goals.
What’s your take on this? How do you calculate your retirement needs? I’d love to hear your thoughts and experiences in the comments below.
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Hi Aperture,
Yes, if there is one sure thing about the future is its unpredictability and the best we can do is prepared to be flexible with the withdrawal rates in retirement. The assumptions are usually based on a retiree never making another dollar but you’ll be doing it the right way by staying active.
I stay diversified to lower risk so I’m not too concerned with the lower returns predictions. It’s like the song “Don’t worry, be happy”. Keep saving and investing and the future will take care of itself. Great comment! Thanks for stopping by!
Hey Enchumbao – nice succinct review of SWR. It seems like this is a topic that can be endlessly mined for new perspectives because (1) it is all about looking into the crystal ball to predict the future and (2) everyone’s response to the unknowable future is different – some want a really big life raft, while others are happy with water wings and swim lessons. Personally, I am interested in frugality as a means of preserving the planet and financial independence as a means of preserving my own sanity. Thus, I am OK with a 4% SWR knowing that I may need to flexibly respond to adverse sequence of returns. Besides, I do not plan to spend my retirement looking at daytime TV. I look forward to developing my hobbies and one of the greatest acclamations I can experience is having someone pay me for something I made or did for pleasure.
I have one little rant: It seems like EVERYONE is stating it as a known TRUTH that US equities will have lower returns in the next 30 years than they did in the last 100 years. I agree that it is reasonable to predict this from the high valuations on equities. But so many are prediciting this that I think most have forgotten that the truth is no one knows what will happen next. This is what makes it all so exciting and fun to be alive. Best wishes.
$1.4M vs $3.5M, what’s the big difference? 🙂
Yes, I am under the assumption that we shouldn’t touch principal and should leave some of our wealth to help other people once we are gone. Healthcare costs, medical costs, a downturn in the markets have a great way of making money DISAPPEAR.
Everybody is lulled into a bull market. I’m preparing for less smooth scenarios.
Best,
Sam
Just a few pennies of a difference. 🙂 I’m assuming that healthcare and medical costs are estimated in the projected expenses when calculating amount needed to retire comfortably.
A more conservative withdrawal of 3%, described above, barely touches principal. Thanks for stopping by! I enjoyed reading your article, it provides great advice overall.