These are some simple basics to get you thinking correctly.

• Your retirement savings need to meet your retirement budget, not your current budget.
• Inflation
  • You need to account for inflation in retirement planning
  • When you see it, you will not believe how much inflation will increase prices
• Greater risk can result in greater rewards
  • Greater risk is bad in retirement
  • Knowledge reduces risk
• Low risk retirement investing would require too much money
  • Long retirements require greater risk investments in retirement
  • Select the least risk that lets you retire when and how you want
• Retiring at or near when the stock market is down can be bad
  • The “sequence of investment returns” matter, even with the average annual investment return
  • A market drop shortly before or shortly after retiring can be devastating
• Buy low and sell high
  • Greed can make you buy high to avoid missing out on gains
  • Fear will make you sell low to avoid losing everything
• You are probably your own worst enemy in retirement planning
  • Greed, fear, and laziness will cause you to do the wrong thing
  • Remove you emotions from the decision process
• Time is your friend.
  • On average, more time means less money needed to retire.
  • As you get closer to retiring, you are no longer dealing with averages.

• Inflation is often assumed to average 3%, sometimes up to 4%
• Plan to live to 94 years old in your retirement plan
• Retirement is often assumed to be about 75%-85% of your inflation adjusted income, assuming:
  • Your house is paid off, a mortgage can be up to 30% of income
  • Your retirement savings stop, which is usually 5%-15% of income
  • Your taxes may be lower due to no earned income
  • You plan to do the same things in retirement that you did while working
• Social security could pay for part of your retirement
  • Can start paying as early as 62 years old with a reduced benefit
  • Benefit estimates may claim it pays up to $4000 per month
  • Adjusted for inflation, benefit estimate is up to $1000 per month
  • In 2035, Social Security is expected to drop to 75% of expected benefits
• Pensions can could pay for part of your retirement
  • Pensions are equivalent to retirement savings of about 10x-20x their annual benefit
  • Pensions often increase their benefit slower than inflation
• You likely need at least 8x-12x your final salary by age 67 to be able to retire
  • To retire early, you may need 25x or more of your salary saved
  • This nifty widget has sliders to see the impact of age and lifestyle. (The sliders still work in the results page)
  • In order to be financially secure, I think you will want:
    • 100% more (2x)
    • 50% more (1.5x) and to invest more aggressively in retirement
• The percentage of income saved during your career is a common benchmark for retiring at about 67 years old. This assumes you start young, at about 25
  • 5% saved annually might be insufficient. You will need Social Security
  • 10% saved annually should be okay, but might need Social Security too
  • 15% saved for your career should be comfortable in retirement
• Rule of 72: (Years to double) = 72 / (Percentage Rate)
  • 72 / (3% inflation) = (24 years for cost of goods to double)
  • 72 / (9% investment) = (8 years for savings to double)

The two lists above probably read like “blah, blah, blah” or “Holy Carp! It is math!”. You might even wonder why you care. The examples below show why you care. These examples assume:

• You are 20 years old. (If not, I am sure that you look like you are.)
• You will retire at 68 years old, a normal-ish retirement age
• You have 48 years until retirement
• You save 10% (0.10x) of your income
• You will plan for living until 94 years old, 26 years in retirement

Without inflation, living 26 years at 80% of your current salary requires about 16x your current salary. Saving this amount of money under your mattress in 48 years would require saving more than 30% of your income every year. This is the upper end of what a bank will allow you to spend buying a house. If your income is on the lower end, social security benefits may significantly offset your required savings. Whatever your situation, a comfortable retirement likely requires more retirement savings than you think it does.

The impact of inflation is difficult to believe for everyone. Using 3% inflation and the rule of 72, prices will double every 24 years. Over 48 working years, a 3% inflation means prices double roughly twice. Your $3.21 per gallon gas will be ($3.21 x 2 x 2) = $12.84 per gallon when you retire. What? No way! Gas was around $0.95 when I was 12, which was 39 years ago. That 3.38x increase from $0.95 to $3.21 in 39 years represents an average of 3.17% inflation for gasoline. By retiring in 48 years, you will need 4x more money for retirement than your current income indicates. That 16x your salary calculated above is actually 64x your salary due to inflation. Compensating for inflation in retirement likely requires even more money that you think it does.

You can “avoid all risk” by sticking your money under a mattress (or in a fireproof safe) until retirement. Saving 10% (0.10x) for 48 years should result in (48 x .1) = 4.8 times your income from 20 years old. Your 4.8x salary is still far short of the suggested minimum of 8x-12x that you need to retire. This ignores the fact that prices have quadrupled by retirement and your 4.8x salary is only worth 1.2x your current salary. In reality, you may have slightly more saved because of promotions and raises early in your career, but it will still not be enough. Without investing, you are unlikely to be able to accumulate enough money to retire comfortably.

You could avoid most of the risk by using a savings account or money market account. On average, you will get about 1% per year. The rule of 72 shows that it takes about 72 years for your 1% to double, so your first deposit only increases by 60%. Rather than 4.8x (1.2x with inflation) under your mattress, you end up with 6x (1.5x with inflation) in a savings account. While you are making 1% on your money, the bank is loaning it out on credit cards for 12%. In the time you accumulated 6x your salary, the bank used your money to accumulate 190x your salary. The bank keeps the upper 184x your salary and gives you the 6x your salary. Seems like a good deal, right? (Well, for the bank it is!) Banks make money off of your money instead of you making money off your money. You need to accept more risk than a bank offers in order to accumulate enough money to comfortably retire.

There are various articles related to greed and fear in investing. Too many people try to “get on the bandwagon” when the market is high. When the market tumbles from the current high, the same people panic and sell. These people buy high and sell low; this is the perfect way to lose money. There are various versions of the price of trying to time the market based on a different duration or starting year. I have seen references as lopsided as an 8.2% average versus 2.1% investor return for the S&P 500 index. With a 9% average S&P 500 return, investing 10% of your salary over 48 years results in 68x your salary. If your attempts to time the market result in 1% lower investment returns, an 8% average return, you end up with only 49x your salary. Multiply your salary by 20x, and that is about what you will be missing from your retirement savings. You need to invest your money and (largely) leave it there instead of constantly trying to move it to the best performing investment. Time in the stock market is your friend; timing the stock market is your enemy.

You will notice that none of this mentions any particular salary. The math is the same no matter your salary. If you make $20k per year or $100k per year, the planning is basically the same:

• Save a designated percentage of your salary
• Invest at an appropriate risk/return for your retirement date
• Continue the plan for the appropriate number of years

A higher salary increases the percentage of salary that you could invest for retirement. This allows you make a trade off between your current standard of living and age of retirement. You could spend less money and retire early … or not. Your choice.