No Magic Calculations Needed

When you con­sid­er retire­ment, you prob­a­bly think in terms of a “salary replace­ment” or how much mon­ey you’ll need each year to have the retire­ment you’d like.

Why then do you focus on how much mon­ey you have saved for retire­ment, instead of what that mon­ey earns?

When you mea­sure your “pile of mon­ey”, you will always need to con­vert it to what you can spend per year. That con­ver­sion is a mag­i­cal for­mu­la with a lot of assump­tions. Many advi­sors will use a 3 or 4% rule. Meaning, you can spend 3–4% of your port­fo­lio and won’t out­live your invest­ments. Well, maybe ((Try Googling 4% rule. You’ll see all the top results are arti­cles about how the rule no longer holds true, in part because of changes in the econ­o­my and the chang­ing nature of retire­ment)). But, the dev­il’s in the details, and the details are all about assump­tions (it can be pret­ty hard to pre­dict things, espe­cial­ly the future).

Why not just invest in such a way that you can mea­sure your income direct­ly? There won’t be any mag­ic cal­cu­la­tions required to fig­ure out the qual­i­ty of life you’ll have in retire­ment.