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Unlocking Retirement Success: Understanding Critical Math

If you have yet to begin the retirement planning process, today is a great day to start.

Written by Jasper Smith

Retirement is coming, and hopefully, you are planning accordingly. If you have yet to begin the retirement planning process, today is a great day to start. To help you on your journey to living a comfortable retired life, here are a couple of numbers you should remember: 80 and 219.

Let’s begin with the 80% rule. Financial planners and advisers use this rule to help frame the retirement conversation for their clients. Here’s an example of how it works.

Say your current annual salary is $75,000. The rule states that to live comfortably in retirement, you would need $60,000/year (80% of $75,000). That breaks down to $5,000/month. (Please note that taxes were not taken from these figures, so you might get a little less than $5,000/month)

Now, the question you might be thinking about is whether you can live “comfortably” with that dollar amount. There are three possible answers:

  1. 80% is a good number, and I should be able to live comfortably.
  2. 80% is too low because I may need more than that to live comfortably.
  3. 80% is too high, and I should be able to live comfortably and on less.

There is no right or wrong answer. The key is determining what kind of lifestyle you want to live in retirement. Your earnings will improve throughout life and your career, so the target may keep moving.

Next is 219. The rule of 219 is not widely discussed, but it helps answer one critical question. How much will it cost you to eat in retirement? The rule assumes the following:

  • You and a spouse/partner/significant other retire at age 65 (two people)
  • You both eat three meals/day at five dollars/meal.
  • You do this for (20) years.
  • There are 365 days in a year.

So, if we do a little multiplication, 2 x 3 x 5 x 20 x 365 = $219,000. Obviously, every meal you eat won’t be five dollars, you may not have a spouse in retirement, and you may live longer than 20 years in retirement. This rule makes many assumptions; however, it is easy to understand—the alternative is to determine your retirement number by conducting a time value of money calculation. That calculation requires a few more inputs, but it’s best to keep things as simple as possible. Simplicity is the goal of this rule. Plus, if you never had a retirement goal to shoot for, at least set the bar at $219,000. That way, you will be able to eat.

Nobody knows how much they will actually need in retirement. But, whether you use the 80% rule or the Rule of 219, at least that will help you get started or reassess and adjust your current retirement plans. Remember, retirement is coming.

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Jasper Smith is the founder of The #BuildWealth Movement®. He’s worked in the financial services industry for over 15 years and holds a life insurance license, multiple securities licenses, and the Certified Retirement Counselor (CRC®) designation.