Saving for retirement.

My favorite topic….kinda.

As I’m mentioned previously, I’m not big on a traditional “retirement.” I love what I do and can’t comprehend leaving because I’m “too old.” However, I AM big on being able to tell “da man” to shove it whenever I feel like it. While I can’t imagine stopping work, I can completely visualize myself doing ONLY work I like whenever I like it.

Which brings up the question of the hour: How much should I save?

I’ve read countless pages on this topic written by well-meaning authors, and surprisingly, most get it wrong. Most discussions zero in on your risk tolerance and types of investments. These are absolutely ridiculous topics to tackle until you know the magic formula.

The Magic Formula

This is FAR easier than you might expect.

You only need three pieces to know how much to save before you start playing with investments and risk tolerance.

First, you need to know when you want to “retire” (or, in Joe lingo, tell the man to go f$%k himself).

Let’s talk about this number for a moment before we move on. Sure, you can make that number early, but what does that mean? as you make that number bigger and bigger you eat into today’s budget.

Also, realize that what you’re really trying to come up with is “how much money will I need if I don’t earn another dime between now and the time I die?” That means you’ll have to make a few assumptions about your goals

Second, you need to know how much money you can save.

Some people ask, “Why Not Just Save As Much As Possible?”

Really?

Do you want to do less today than you possibly could? Why would you sacrifice the now too much for a future that might never arrive? If you’re into pain, save every penny. Me? I’m more about balance. I want to save enough for tomorrow, but I also want my ice cream today.

Third, you need to know what return you expect on that money.

Financial guru Dave Ramsey famously had a public fight with Certified Financial Planners on twitter, who were admonishing him for suggesting that people can count on a twelve percent annual return on their long term investments. While I often love Dave’s advice, I never want to count on a return that’s higher than the average. Historically, most investors average far less than the financial markets, which have performed, over long periods of time, at around a ten percent clip.

We’ll tackle “risk tolerance” and when to think about that, later.

Those are it.

Once you have those three numbers you can arrange them like this:

Amount You’re Saving x Return on Investment = Your “Tell Off The Man” Goal.

Sure, you’ll need some calculators to figure out the formula, but I think you know where this is headed. Once you come up with the number you’ll need to “Tell Off The Man,” you can easily find out if your savings rate and return fit the goal.

Here’s When Risk Tolerance Matters

If you can’t meet your goal, you have a few choices to adjust course:

–    push back your “Tell Off The Man” date,

–    live on less after you tell him off,

–    save more money,

–    or jack up your rate of return.

Now your risk tolerance actually matters. Instead of choosing in a vaccuum, now you’re talking about risk toward meeting your goal. There’s a huge difference between “I really don’t like this type of investment” and “I’m not going to do what it takes to reach my goal, so something has to give.” As Steven Covey wrote in The 7 Habits of Highly Successful People, when you pick up one end of the stick, whether you want to or not, you pick up the other end, too.

Once you know the return you’ll need, it’s easy to look up which types of investments historically have given you that return. If you can’t stand the risk these investments present, you have three choices:

–    Teach yourself to take the risk.

–    Back down the risk and save more money.

–    Back down the risk and push back the goal.

See how that works?

Don’t get sucked into a “risk tolerance” quiz or investment discussion until you know your retirement formula. Why look up investments or make risk-based decisions without knowing what you have to do first?

Looking for more? Joe is cohost of the Stacking Benjamins podcast and writes at the blog by the same name.