# How Much Wealth Do You Need?

“The trappings of lifestyle are often that – traps.” – Thomas Leonard

On Monday, I talked about Lee Eisenberg’s book The Number, which asks the question: How much money do you need to retire?

The book is full of interesting data and some good ideas – but it never provides a useable number. Instead, Eisenberg does what most self-styled financial experts do when asked a direct question: He hedges.

How much you need to retire depends, he ends up saying, on all sorts of economic, financial, and psychological conditions. Only you can make that determination.

Well, thanks a lot. Why did you write the book, then?

Let’s not play that game. Today, I’m going to tell you how to determine exactly how much money you need to retire.

Here is the “quick-and-dirty” formula I promised you on Monday when I reviewed the book:

1. Figure out how much you are spending this year on your current lifestyle. Be sure to include all the big items, such as housing (rent or mortgage payments), insurance, upkeep, taxes, clothing, food, etc. And make sure you include all the costs, including an allocation for occasional expenditures, for vacations, impulse purchases, and emergences.

2. Add to that the net annual cost of any extras that would bring you up to the lifestyle you want. For example, if your car lease is currently \$3,000 a year for a Toyota and the Mercedes you want to drive in retirement is \$10,000 a year, add \$7,000 to your yearly budget.

3. Multiply the result by 20. That’s your number – the amount of money you need to have socked away before you can quit your job and begin living off the interest.

Say you are currently spending \$80,000 a year to live as you are living. And say you’ve determined you need to spend an additional \$60,000 to be really happy. The sum of those two figures (\$140,000) multiplied by 20 is \$2.8 million.

Important Note: This multiplier, 20, is new for me. It’s higher than the one I set for myself when I began making money. And it’s higher than what I’ve suggested in past issues of ETR and even in my last book, Automatic Wealth for Grads…and Anyone Else Starting Out.

I’ve raised the bar because I’m getting older and feeling more conservative. If you set and achieve this kind of financial target, you’ll probably have more money than you’ll ever need. But that’s a problem I’m sure you will be happy to have. It’s much better than ending up pinching pennies when you are 80 and thinking, “What the hell was Masterson thinking?”

To show you what I mean, let’s do some arithmetic. If you put your entire \$2.8 million in municipal bonds at, say, five percent (a little high by today’s standards, but historically safe), you’d have \$140,000 in tax-free income to cover your lifestyle.

If you got a 10 percent yield (the long-term stock market average) on your money, you’d earn \$280,000 a year, which would net to \$154,000 after 45 percent in taxes. (Though you shouldn’t be paying nearly 45 percent, because much of your investment income will be taxed at the lower – currently 15 percent – rate for capital gains.)

If you incorporate solid, rental real estate into your investment mix (as I urged and explained in both Automatic Wealth: The Six Steps to Financial Independence and Automatic Wealth for Grads), you can get a return on investment (ROI) that’s higher than 10 percent.

How much higher? That depends on how well you buy property, how long you hold it, and how well you manage it. But I think it’s safe to say that your real estate can give you an overall ROI closer to 25 percent, which might bring up your average investment yield to between 12 and 18 percent, depending on how much real estate you do.

Keep in mind that owning rental real estate involves some risk and takes some work. But that’s why you can get those better yields.

Still, even if you don’t invest a single nickel in real estate, a multiple of 20 will almost certainly provide you with all the income you’ll ever need. So that’s your number: 20 times what it would cost you right now, this year, to live your desired retirement lifestyle.

To help you choose a “desired retirement lifestyle,” take a look at the following:

Modestly Comfortable (\$150,000 a year): You have all you need. You and your spouse live in a modest-but-comfortable house, drive late-model (but not fancy) cars, go out to dinner at moderately priced restaurants several times a week, and you take several weeklong or 10-day vacations (economy class).

Quite Comfortable (\$500,000 a year): You have all you need and most of what you want. You and your spouse live in a modest-but-luxurious home in a nice neighborhood, you drive luxury cars (but not brand-new), you dine regularly at the best restaurants, golf and play tennis at the club, and take three business-class vacations a year.

Extremely Comfortable (\$1 million a year): You have all that you need and more than you really want. You and your spouse live in a multimillion-dollar house (or townhouse), drive very expensive luxury cars, fly to Le Cirque in New York for weekend dinners, belong to several golf clubs and resorts, and vacation pretty much non-stop.

Did that help?

Okay, now it’s time to choose. What kind of lifestyle will make you happy? Modestly comfortable? Quite comfortable? Or extremely comfortable?

And now you can choose your number:

To be moderately comfortable, you need \$3 million.

To be quite comfortable, you need \$10 million.

To be extremely comfortable, you need \$20 million.

All things being equal (and they never are), it’s better to have modest ambitions. If you can learn to be happy on an income of \$150,000 a year, it will be that much easier and faster to hit your number and retire.

One thing to watch out for: As you hit one target, don’t set another, higher one. I did that. Not just once, but twice. And so did most of the multimillionaires I know. Raising your wealth target is a natural impulse when business is booming and you’re feeling strong, but it can become a sort of addiction. At some point, you end up like some stereotypical rich guy in a B movie – all drive and no heart. You don’t want that to happen to you.

It takes courage and wisdom to set a target and stick with it. I admire the few people I know who were able to do that. They kept their spending habits in check and stuck to their original goals. They got off the train when they reached their stop.

[Ed. Note: The best way to achieve your “number” – and the level of comfort you want when you retire – is to increase your income. There’s no better place to learn how to do it than at this year’s Information Marketing Bootcamp. Meet Michael in person October 30 – November 2, 2006 in Delray Beach, FL. Sign up now to reserve your spot – and then look forward to rubbing elbows with the many experts who will be there.] [Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]