The Number - How much money do you need to retire and live the life you really want? Notes from Eisenberg

 

It’s tough right now. I know it. A cart of groceries at Walmart cost $250 yesterday. We didn’t even buy meat.

It can be really devastating to look at your budget, to look at your life, and see that all the hard work you put into your career to get to where you are, and all the hard work you put into cutting bills and expenses so that finally the income exceeds the expenses more often than it doesn’t… and then see the prices of everything you need skyrocket so fast that all that work is lost. It feels like a punch in the gut, and then the government follows it up with an uppercut by telling you that inflation isn’t really that high.

If you’re young, you still have a lifetime of earning to make up for it. But, if you’re over 50 you’re looking at some harsh realities. You can’t afford to dip into savings now and you don’t have a lot of opportunities to increase earnings. If you are still working, you can still be saving, so there’s no time like the present to figure out how much you are going to need.

I read this book called The Number. It promised to tell me “the number”, how much money do we need to have invested to earn enough interest to live off.

THE NUMBER

If you just want numbers, here’s the easy math - invest one million dollars and you can draw $40,000 to $50,000 per year to live on. No need to keep reading.

Eisenberg suggests that the number means something more than that. Enough to write a whole book about it. When it comes to investing, he offers ten commandments.

1.       Do not put all your eggs in one basket

2.       Have the patience of a nesting hen

3.       What goes up, eventually comes down

4.       Do not invest in something you don’t understand

5.       Do not question the power of compounding interest

6.       Do not squander returns on commissions and management fees

7.       Honor the company retirement plan – match all you can

8.       Take only the risk that lets you sleep at night

9.       Honor age and timeline by properly diversifying: Stocks, Bonds, Real Estate, Cash

10.   4% is your draw down number – you can expect to be able to draw 4 % of your investment annually, so one million invested means you could expect $40,000 to live on.

If you are looking at retirement and trying to figure out how to keep living your lifestyle without a regular job and paycheck, here’s another piece of advice he offers. Look at Social Security, pensions, and fixed income investments to cover essential living expenses like food, shelter, heat, etc. Higher risk investments should be earmarked for luxury items like trips. This way, luxuries can be scaled back when the market is down without putting your ability to pay the necessities at risk. This isn’t a once and done plan though, you have to always be watching as interest rates and inflation are always fluctuating.

If you can’t retire yet, Eisenberg suggests another option he calls Downshifting. This is not quitting work so you can goof off but spending less time at work and more time working at things you love. Maybe you’d like to volunteer at a charity or write a book.

He suggests three big questions you have to answer honestly.

1.       Assume you have all the money you need right now for the rest of your life. What would you do with it? How would you live? Write down the answer to this question before looking at #2.

2.       Imagine you go to the doctor. You find our you have a rare illness. You will feel fine but in 5 to 10 years you will suddenly die. Knowing this, how will you spend those years? Write down your answer to this question before going on to #3

3.       The Big Q! This one sounds like #2, but read carefully. You go to the doctor and find out you have a rare disease. You will feel fine, but you will suddenly die in 24 hours. What did you miss? Write down your answer before you read on.

 

The answer to #3 is what The Number is for.

Here is a simple equation to help you figure out your number. Add your expected social security + pension + other income sources = anticipated income

Anticipated need – anticipated income = how much income you need to replace

Income to replace divided by .04 = Invested assets you will need to live the lifestyle you want

Finances are hard right now. Most of us are struggling. But we can't control the prices, all we can control is how we spend the money we have. So, take control of your dollars and find out your number.