This was the title of a book by Lee Eisenberg which had many interesting anecdotes, but let me down a bit, as I was expecting a deeper dive as to how the number was arrived at.
What is ‘the number’? Well, it’s the amount of money you need to never have to work again. And it’s calculated by multiplying the annual needed amount by 25. This equates to a withdrawal rate of 4%.
Let’s say that you make $60,000/ year, are 62 and retiring now. From ssa.gov you can calculate your monthly benefit as $1434. Now, let’s assume that some of your earnings went to savings and expenses that have ended upon retirement (such as mortgage payments, etc). You might only need 80% of your preretirement income to live on, or $48,000. As social security will provide $17,000 of that, ‘only’ $31,000 will need to come from savings/401(k), etc.
It will take a nest egg of $775,000 to provide the needed $31,000/yr of income.
While this may look ominous, consider this; A quick spreadsheet shows that someone earning $60,000/yr, and saving 10% each year, while earning a rate of return of only 8%, will amass a balance of $825K. This assumes working from age 20 to age 62, and a rate of return well below the 10%+ that the market averaged during that time. At 10%, you’d have better than $1.4 million dollars. Choose an employer who will match your 401(k) by 5% and you are over $2.1 million.*
Note: this example assumes the 62 year old is retiring now at a final salary of $60K. He started at age 20 earning $17,338. Thank you for the letters point out this ambiguity. For the calculations used, please see the spreadsheet page where you can change the assumptions to reflect your situation.