I'm trying to figure out what I will need to retire, so I can plan accordingly and can achieve my targets without any heroic efforts at dramatic belt-tightening later in life...
Every resource I tap has a different formula. Here's what I think makes sense for me...
The necessary condition for retirement is to be debt free... I currently have a mortgage, but no other debt - I must have my home paid for.
But more importantly, I think that my uncommitted liquid assets (investments, savings accounts etc. outside of any funds earmarked for college for our kids (when we have them) should equal 50 times our annual expenses the day we retire. In addition, we should have a bit extra set aside if we are retiring early.
Based on where we currently live, I think our expenses would probably be about $4k p.m., at current prices, including property tax, condo fees, utilities, food and entertainment, health insurance, occasional travel and setting aside money to buy a reasonable car every 5-7 years.
This translates into a $2.4M retirement fund target at today's prices. Assuming a conservative 3% withdrawal rate, that would allow me to withdraw $72k per year, or about $48k after federal and state taxes.
In the meantime, a conservative portfolio should be able to generate about 6% returns, which would give us the ability to keep pace with inflation, especially in the early years. However, our consumption basket will shift towards healthcare over time, and we will probably experience higher inflation than the broader economy, so we are still exposed to the risk that we might need to tap into principal during retirement.
But if my plan calls for us to tap into principal, like so many plans out there, we don't have the buffer to absorb major shocks (either financial / market shocks or health shocks).
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