Experts Say This Magic Number Is the Key to Any Successful Investment Portfolio
Written by
Martin Dasko
Edited by
Joe Evans
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There are various opinions on how much money you need to retire or live your desired lifestyle. Some think you should base it on your current salary, some think you should base it on projected needs, and others think it is a nebulous number you might never really know.
If you want to be financially free one day, experts explain to GOBankingRates how they define the most important “magic” number for your investment portfolio.
Zero Debt
“For many people, the magic number is zero, as in zero debt,” said Jay Zigmont, CFP and founder of Childfree Wealth.
One unique approach is to focus on paying down your debt to be debt-free and live on your own terms. Once you pay off your debt, you can spend all your income as you wish.
“When you have no debt, you have lower expenses and more you can invest,” Zigmont said. “It’s the first step towards true financial freedom. Paying down your debt is effectively a tax-free, risk-free return of the interest saved. With credit card rates at 20% plus interest in many cases, you are unlikely to beat that return by investing.”
25 Times Your Current Living Expenses
“Many proponents of the broadening Financial Independence, Retire Early (FIRE) movement focus on building a portfolio that’s 25 times your current living expenses,” said Stephen Kates, CFP and principal financial analyst for Annuity.org. “This equates to a 4% withdrawal rate, which is undoubtedly a good goal to aspire to.
This leads us to the next number …
The 4% Rule
“The 4% rule states that if you withdraw 4% of your investment portfolio every year, adjusted for inflation, it should last you at least 30 years,” stated Michael Collins, CFA and founder and CEO of WinCap Financial.
Collins added, “This rule is based on historical market data and is considered a safe withdrawal rate for retirees. So, if your annual expenses are $50,000, your magic number for financial freedom would be $1.25 million ($50,000 divided by 0.04).”
Kates shared one warning about this rule: “However, that 4% withdrawal rate comes from a study meant for retirees and only showed that it could sustain a portfolio over a 30-year retirement period. If you’re retiring early, much more planning is required.”
Thanks!
If you’re looking for that magic number, you’ll want to run the calculations here to find out what your 4% rule would equal.
Magic Number = Final Full Salary x Years Retired
“In general, 80% of your income at retirement has been considered the magic number,” said Scott Lieberman, founder of Touchdown Money. “However, people have found that while some costs do decrease, others can increase. For example, you might spend more time traveling now that you don’t have to tie yourself to a work schedule.
“The magic number is your full final salary times the number of years you expect to be retired. For example, if you plan to retire for 20 years and make $80,000 a year, you’ll need about $1.6 million.”
How You Can Find Your Magic Number
Since personal finance is unique to each individual, you’ll likely have a different magic number than someone else. Here are a few points to consider.
Your Mindset and Financial Values
According to Kates, the only magic number is “enough.”
“This is of course the opposite of ‘more,’ which is what most people want from their finances,” he said.
Your mindset and financial values will determine how much money you need in the bank to feel financially free. Because everyone has different goals and expectations, it’s challenging to provide an answer without knowing your priorities.
Your Lifestyle
“Your magic number is as unique as you are,” said Erik Severinghaus, founder and CEO of Bloomfilter. “It depends on factors like how you want to live, what your expenses look like and even how long you expect to live. So, if you’re a jet-setter with expensive tastes, your magic number might be higher. But if you’re happy with a simpler lifestyle, it could be lower.”
How do you know how much you need to be financially free? You’ll have to honestly assess your current and desired lifestyles to determine how much money you’ll need.
Your Expenses
“In my view, the most important number is not related to the value of your investment portfolio but rather how much you are actually going to spend in retirement,” said Chris Urban, CFP and founder at Discovery Wealth Planning. “People tend to focus on the size of their nest egg too much when they should spend more time coming up with a detailed forecast/budget for the expenses they will have at least in the first several years of retirement.”
You’ll have to run your expenses to determine how much money you’ll need to have set aside to feel financially free. Without knowing this information, thinking of a magic figure is challenging.
Closing Thoughts
“As much as I’d love to give every reader the perfect answer, it’s rarely so simple, which is why there are so many financial advisors, financial strategies and financial troubles,” Kates said.
There’s plenty to consider when figuring out how much you should save for financial freedom. The good news is that you can customize your savings and goals based on what you want from life.
Severinghaus concluded, “So, whether your magic number is $500,000 or $5 million, it’s worth figuring out. Because once you do, you’ll be well on your way to living life on your own terms — and that’s the real magic of financial freedom.”
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