Retirement Planning: How to Determine Your Personal ‘Enough’ Number
Do the Math Now to Set Clear Goals for Your Future
Retirement planning forces you to think about lots of different numbers: annual investment returns, your debt to income ratio, your net worth, and more. Perhaps the most important number, however, is your personal “enough” number.
Your “enough” number is that magic figure that defines exactly how much you need in order to have the retirement you desire. It’s the number that helps you set financial goals that are tied to your lifestyle goals. Identifying it is a necessary step in setting your retirement savings goals and in understanding whether you’re on track to meet them. At this stage of life, while you’re still working, your “enough” number includes the amount you need to fund your basic needs, as well as the wants that make your life enjoyable and the savings-plan required for you to meet your retirement goals.
In a time when many of us are re-evaluating our personal finances as we ride out economic uncertainty, long-term financial planning becomes even more imperative. So, how do you determine your personal “enough” number?
Step 1: Avoid the Arbitrary
Defining this number for yourself should be an individual, intentional exercise that accounts for your personal goals, rather than those that arise from societal norms or simply vanity. For instance, many people set arbitrary salary goals for themselves because there’s a certain status that comes with six-figure annual earnings or running a million-dollar business. You have to ask yourself, though, if achievements like this are actually helping you progress toward the lifestyle you want to build. It’s important to determine whether your salary goals are in line with your vision and life goals – and you may find that your “enough” number is actually higher or lower than the arbitrary number in your head.
To decide whether your goals are arbitrary or truly circumspect, you’ll need to spend time reflecting on your current goals and priorities, as well as those that will serve your desired future. One helpful exercise can be to identify 3-5 core values that will guide your planning. This Life Values Inventory is a great place to start if you’re unsure where to begin.
Your identified values may be things like:
- · Family
- · Charitable Giving
- · Travel
- · Education
- · Personal Development
Doing this internal values work can be a useful exercise, especially as we face an unprecedented time in our world. Many people are reevaluating their values, and you may find that your true priorities in life have shifted. Gaining clarity in your values is necessary as you set your priorities going forward.
These priorities could be things like:
- · Saving for your children to go to college debt-free
- · Paying off your mortgage early
- · Donating to charity annually
Once you’ve identified your values and translated them into priorities, you’re ready to set clear financial goals.
Step 2: Do the Math
Let’s take the three sample priorities above and add dollar values to them:
- · $80,000 for each child’s college fund over the next decade (depending on their age)
- · $15,000 per year for five years to pay your mortgage off ten years early
- · $2,000 to support your favorite charity each year
After attaching dollar figures to each priority, consider whether there are alternative ways to fund them. For instance, does your employer match charitable gifts? If so, you can save $1,000 annually and still support your charity at the level you desire, making your true cost for this priority $1,000 each year.
Once you know your true cost for each priority, you can factor in your other financial goals and day-to-day expenses. Use this equation:
Annual Priorities Total Cost
+ Annual Living Expenses
+ Annual Emergency and Retirement Savings
+ Annual Debt Obligations
= Your “Enough” Number
It’s not uncommon to be surprised by your number, finding that it is either much higher or much lower than you expected. If it’s higher, you can begin planning to increase your earning potential. If it’s lower, you can breathe a bit easier.
Step 3: Consider – or Reconsider – Your Retirement Savings
Using the above formula presents a few really important numbers to you in black and white. You can begin to see exactly how your priorities will impact your spending in retirement if you plan to continue them once you stop working. If that’s the case, add them to your total retirement cash flow needs and adjust your savings plan accordingly. You may need to save more each month or set aside a lump sum now that will position you to achieve your financial priorities as a retiree too.
If you’re struggling to figure out your ideal retirement savings plan, begin by estimating that you’ll spend about 80 percent of your current salary annually. Take into account whether your mortgage will be paid off or whether you’ll have other debts. A retirement savings calculator can also be useful.
What if Your “Enough” Number is Too High?
Sometimes, the math won’t work the way you had hoped, and you’ll find that it’s not achievable to reach your savings goal in your current financial circumstances, especially if recent market volatility has impacted your nest egg. If you find yourself here, you’ll need to begin asking hard questions. For instance, does your employer offer you the opportunities required for you to reach your dream salary? Do you need to change your business model to lower your overhead? Could a side hustle be necessary to supplement your income? Questions like these allow you to identify roadblocks and problem-solve to overcome them in the present.
Another option is to consider the idea of an encore career. Many people continue working part-time in retirement, and consulting or freelancing are flexible ways to earn more without feeling tied to a desk. If you can lay the groundwork for an additional income stream in retirement, you have less need to save more in the present.
Determining your personal “enough” number is crucial, and it can be an eye-opening exercise that requires you to rethink your values, priorities, and financial plans. In the end, though, this number will allow you to plan confidently for the future you want for yourself and give you a roadmap for getting there.
If you’d like professional guidance to complement your personal planning, let’s start a conversation today. Working with a financial advisor is an excellent way to gain even more confidence in your “enough” number and your path toward achieving your financial goals.