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How Much Do You Need To Retire? Use The 30% Rule

How Much Do You Need To Retire? Use The 30% Rule

Before we start this week’s issue, a brief announcement.

I’m holding a call just for The 10th Man readers next week. We’re calling it The 10th Man 5: 5 Things That Could Freak Your Portfolio Out in 2019.

Hopefully that’s self-explanatory. I’m going to talk about five factors that could harm or help your portfolio this year.

They’re probably not going to be factors you would guess—it’s my own personal list, not one you would see anywhere else. And they’re factors that could have a sneaky impact on your portfolio before you even realize it. Lots to talk about!

Access to this call is pretty cheap (it’s free). And you don’t have to do anything to access it. I’ll email you a link to listen on Tuesday, March 12. So check your inbox… you’re not going to want to miss it.

Back to Retirement

How much money do you need to retire? Ask the Google monster!

Page one of the results gives you a wide range of numbers, mostly between $1 million and $2 million. Of course, most people retire with less than that. They make it work.

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Stop trying to think about retirement in terms of absolute numbers. It is all relative.

One of my longtime readers, Neile Wolfe, of Wells Fargo Advisors in Austin, TX has an elegant solution to the problem. Neile is a fellow divergent thinker and is, hands down, the most thoughtful advisor I have ever met. Look him up.

Here is the heuristic:

  1. Take the market value of your house—and multiply by .3. That is the income you need in retirement.
  1. Take that number, and divide by .04. That will give you the assets you need to retire with.

Let’s do an example.

Let’s say you are fairly well-to-do, and you live in a house whose market value is $1.4 million. Not what you paid for it—the current market value. You can look it up on Zillow if you’re really stumped, but my guess is you have a good idea what your house is worth.

So take $1.4 million, and multiply by .3, which gives you $420,000. That is the income you are going to need in retirement.

You probably think that number is high, and that you can get by on less than $420,000. Let me tell you why you can’t.

First of all, $1.4 million houses are expensive to maintain. It will cost you, on average, 1-2% every year. 0% some years, and 5-6% other years. But that is the least of your problems.

If you live in a $1.4 million house, you live in a pretty nice neighborhood. Those houses have pretty nice cars in front of them, and so will yours. Maybe you think you will have an old rustbucket sitting in front of your $1.4 million house. Then you will be that guy.

If you are living in a $1.4 million house, you are not buying your clothes at Old Navy. You are not getting your furniture from Bob’s Discount Furniture. You are not getting your jewelry from Kay1. You are not getting your groceries from Wal-Mart—you are going to Whole Paycheck.

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All of this stuff adds up. Your lifestyle, and all the money you spend, comes from the house that you live in, and the zip code that it sits in.

If you really want to spend less money, get a smaller house!

Funny thing about those FIRE people living in tiny houses. They are right about one thing—they know that the house drives the spending, so they live in the smallest house possible. You and I aren’t willing to make those sacrifices.

The house is everything. This is why people downsize when they retire. It isn’t really about needing less space. It’s about taking down your spending.

Wait—it gets even better.


For The 10th Man readers only...

The 10th Man 5:

5 Things That Could Freak Your Portfolio Out in 2019

What? An exclusive call with me, Jared Dillian

When? March 12, 2019

Where? I’ll email you a link so you can listen at your leisure (for free!)

Why? Ignore The 10th Man 5 at your portfolio’s peril...

What now? Make sure you check your email on March 12


The 4% Rule

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You have probably heard of the 4% rule. It says you can safely withdraw 4% from your retirement savings annually during retirement. So if you have $1 million, you can take out $40,000 a year. Simple enough.

Let’s go back to the example above. You live in a $1.4 million house and you need $420,000 to live on in retirement. How much savings do you need?

$420,000 divided by .04 = $10,500,000.

You will need over ten million in savings. That’s a lot!

You wouldn’t need ten million in savings if you had a cheaper house. If you downsized into a $300,000 house, you would need $90,000 in income, and $2,250,000 in savings, which sounds about right.

The house drives everything. The house drives everything. The house drives everything.

Do the math with your own house. Or if you don’t own a house, use the market value of whatever property you’re renting.

If the numbers don’t line up, you’re probably going to have to make some adjustments.

It’s the Better Way

Imagine saving for retirement and thinking you have enough… and then you don’t have enough.

It’s good to think of retirement savings as a moving target than a fixed amount. And you’re in control of it!

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My friend Neile also points out that assets like planes, boats, and second homes all require their own stream of income and should be included in the calculations.

And don’t forget: check your inbox on Tuesday, March 12 for access to The 10th Man 5: 5 Things That Could Freak Your Portfolio Out in 2019.
1 More kisses begin with Miller Lite than begin with Kay.


We welcome your comments. Please comply with our Community Rules.

March 7, 2019, 5:16 p.m.

Jared, rubbish!
I live in a home worth twice your example, and my yearly burn is half what you quote. Love your letters and your advice is typically good, but you really got lazy on this one.

Bradley Stephenson
March 7, 2019, 2:22 p.m.

I see that social security and additives to income(rents, royalties, partnerships) have been mentioned. Another key is to pay off everything before you retire. In my situation, the 30% rule provides more than enough to live comfortable and even increase net worth through practical investing. Nice article!
March 7, 2019, 1:53 p.m.

While I certainly agree that you need ample resources in retirement, that math does not work for us in Southern California.  I live in a million plus dollar home and I have never come close to making that kind of money working, much less do I expect to in retirement.  And as far as the cars driven, I have very nice cars, though not new they are well kept and well maintained, and I do not have a $1,000 dollar a month car payment.
March 7, 2019, 1:10 p.m.

I assumed that SS was factored in to Jared’s calculations.

on another note, I rarely if ever hear a financial planner talk about ones physical health and well being when discussing retirement needs in money terms.  Should i work longer ? Is it better to have good health or good health insurance?  If I keep working my health insurance is better and costs less.  If I retire, i can take better care of myself but it will cost me more.  Let’s say your in your late fifties or early sixties, Is the stress of a job/commuting and reduced physical activity worth giving up better health NOW so that we reduce the risk of running out of money when we are 90.  My sense is most FP’s are more worried about your 90’s than your 60’s

This assumes you are lucky enough to be able to choose.
March 7, 2019, 12:30 p.m.

Surely it depends upon the age you retire at.

Adam Schwartz
March 7, 2019, 11:15 a.m.

To those that want to subtract social security from the income needs before dividing by 0.04…good luck with that :).

Adam Schwartz
March 7, 2019, 11:13 a.m.

I think this formula makes sense in Austin, TX, but where I live (SF bay area), $1.4M is not a big house with lots of up-keep.  It’s probably the equivalent of a $0.7M house in Austin.  Admittedly, cost of repairs and so forth is probably higher in the bay area, but not by that much.  Also, if your biggest housing expense now is the mortgage and you have that paid off by the time you retire, surely the full cost of your home ownership will be significantly reduced.
March 7, 2019, 10:38 a.m.

Good morning Jared.  I enjoyed the “rule-of-thumb” provided by Neile Wolfe.  I wasn’t clear however whether the 30% of your home’s fair market value calculation produces an estimate of needed annual income before-tax or after-tax?  Also, as mentioned by another commentator, I do believe one should subtract social security benefits and pension benefits before dividing by .04.  Additionally, my sense is that whether the accumulated assets are pre-tax or after-tax assets can be material.  As another rule-of-thumb, a financial consultant by the name of Charles Farrell recommends that if your goal is to retire at 65 you should have savings equal to 12 times your annual salary and no debt - mortgage, car or credit card.  As I’ve related to my children - live below your means and save until it hurts.  Have a great day.
March 7, 2019, 9:40 a.m.

And maybe step 1.5 Reduce that number by any continuing income streams (pension, annuity, social security, etc.)?
March 7, 2019, 9:21 a.m.

Jack: I also caught that flaw in the article - after my heart beat had increased significantly upon considering my current situation.  Factoring in SS brought the rate back down.  Good thing - I will not have to do any aerobic exercise today!

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