Turning That Into a Savings Target (by Hand, on Paper)
Okay. Last lesson we got your yearly spending number, the sunday-best guess of what retirement actually costs you a year. Today we turn that into an actual savings target. A number you're aiming at, not just a number you're aware of.
Get out the ledger, or a plain sheet of paper. Not a spreadsheet for this one. I want you to feel this number, and I think the pen does that better than the screen does. That's just me, but I've watched a lot of people nod along at a spreadsheet total and then completely forget it by the next line. Handwriting it makes it stick.
The 25x rule (and why it's rougher than it sounds)
Here's the shortcut most people land on eventually: take your yearly spending number and multiply by 25.
So if you figured you'd need $40,000 a year, that's $1,000,000. If it's $60,000 a year, that's $1,500,000.
Where does 25 come from? It's tied to the idea that you can pull about 4% of your savings out per year and have a decent shot at not running out. Four percent of a million dollars is $40,000. Flip it around and you get the 25x.
I want to be honest about this rule the way I'd want someone to be honest with me. It's not a law of physics. It's a rough guideline built on historical market averages, and markets don't owe us the future just because they behaved a certain way in the past. Some years you'll pull out 4% and your account still grows. Some years you won't be so lucky. It's a sunday-best guess sitting on top of another sunday-best guess. That's fine. That's the whole point of this module. We're not waiting for certainty, we're working with what we've got.
Do the math on paper, right now
- Write your yearly spending estimate at the top of the page.
- Multiply by 25. If math in your head makes you nervous, use a calculator for this part, nobody's grading your arithmetic. I've added a wrong column before and thought we were $340 richer than we were. Aaron caught it. Double-check your own work, always.
- Write the result in big numbers. This is your target.
- Under it, write what you have saved for retirement right now, today, across every account. 401k, IRA, whatever you've got.
- Subtract. That gap is what you're working toward.
That's it. That's the whole exercise. It'll take you ten minutes and it'll probably make your stomach do something. That's normal. Almost everyone's gap looks big the first time they see it on paper.
The gap is not the assignment
Here's the thing. I don't want you staring at that gap number and deciding it's impossible, because it isn't, it's just far away. What matters this year is not closing the whole gap. What matters is contributing something, consistently, and letting time do a lot of the heavy lifting you can't do by force.
I opened my Roth IRA with $50. That was it. Fifty dollars, because that's what was left over after the month, and honestly I felt a little silly about it. It didn't feel like it was doing anything. Fifteen years later, that account is the one I point to when someone tells me small amounts don't matter. They do. They compound quietly while you're not looking, and one day you look and the number surprises you.
So write down your gap, respect it, and then set it down. You don't have to fix it all at once.
A note on the fear that shows up here
Some people do this exercise and get scared enough that they stop opening the envelope again, which is the opposite of what I want. If your gap feels enormous, that's information, not a verdict. It might mean you adjust your spending estimate, or push your retirement date out a couple years, or increase your contribution percentage next time it's easy to change (open enrollment, a raise, whenever). It doesn't mean throw the paper away.
And if the number feels fine, don't get too comfortable either. Recalculate this once a year. Your spending guess will get more accurate as you get closer to retirement, and the market will do whatever the market does. This isn't a number you set once and forget. It's one you keep checking, the same way I keep the ledger every single night, so nothing surprises us.
Before next time
Keep that page. We'll come back to it soon when we talk about what to actually do with a gap that feels too big to close. For now, just sit with the number a few days and notice what it makes you want to change. 💛