Steve, one of the most important numbers that you need to know if you are doing retirement planning, in my view, is your magic number. What is your magic number? Well, it’s the amount of money you’re going to need to support your lifestyle for the rest of your life once you retire. It’s also the amount of money that you need to learn how to protect. And I want to get into that with you in today’s episode. So do you have enough money to retire on we’re going to give you five steps to figure it out. Retirement planners of America. RPOA.com, hello. I’m Ken Moray. I’m the founder and CEO of Retirement Planners of America, and as the name implies, we specialize in retirement planning, which means that all of the things that we do and everything we talk about here on our videos and our podcasts are the very same ideas that we talk about with our beloved and most valued clients. We work with over 6500 beautiful, wonderful families across the country, and in our content, we want to share with you the ideas, the strategies, the same conversations that we have with our clients, and one of the most important conversations we have with a brand new client is the magic number. In other words, how much money do you need to have to support the lifestyle that you want to have during your retirement and it needs to last for the rest of your life? So it’s going to be a lot of heavy lifting through thick and thin bear markets and taxes and inflation, all that kind of stuff. So knowing how to calculate that number is very important. And I have Jeremy here with me to kind of help me to walk through the whole thing Absolutely. So I think that’s that magic number. The biggest question is, how do you calculate it? Yeah, well, they’re basically there. As I said, there are five steps, and the first step is, we want to know how much income you’re going to have during your retirement. Okay, so most likely, you’re not going to be working full time anymore. You won’t have wages, but you could be working part time. You may have some income from that. So we want to include that you may have Social Security. Most of our clients have Social Security. If you’re really fortunate, you might even have a pension. Those don’t exist very much anymore, but some people have those also. If you’re even more fortunate than that, you may have a rich uncle that gives you money as a gift every year. We have quite a few clients that are fortunate in that regard. You may have rental, real estate, property. So we want to gather all the sources of income that you’re going to have during your retirement. This is after you’ve retired. Yeah. So what would you say is the biggest thing, or the most common thing that people miss as far as money coming in, what do they not think of actually, I think you should ask that question when we get to expenses, because they usually they can think of all of their income. Yeah, money coming is pretty easy to most people know exactly how much money they’re going to be coming in, but when it comes to expenses, which we’ll get into here next, yeah, that’s when a lot of times people kind of underestimate what their expenses are, little hidden ones. Okay, so I know Social Security is a really big deal, especially for the age group that we’re talking about. If I’m not on social obviously, not me. If I’m not on Social Security, how do I figure out how much I might earn? Yeah,

that’s actually you’re right. If, when you’re looking at creating your magic number, and you’re looking at the income, one of the most important sources of income for most of our clients, outside of their investments, is Social Security. And Social Security is extremely complex. Believe it or not, there are over 9000 combinations of how and when you can take Social Security, depending on your age, your spouse’s age, the differences in your incomes. I mean, there’s lots of different combinations. So that’s going to impact the income part of the equation that we’re talking about in terms of calculating the magic number. So that’s something that we do with a with a new client. And obviously, as the as the laws change and all those kind of things existing clients are, you know, building towards reaching retirement, Social Security age. Yeah, we have to keep track of that and make sure that we’re up to speed on, you know, the when and the how, absolutely so income pretty easy to track. Income is pretty simple, because you know when you’re making cows, yeah, it’s relatively straightforward, yeah. So what about when you’re spending? Okay, so spending is kind of interesting. So when we’re looking at what your expenses are, we want to take into account everything that you spend money on, except for income taxes. Okay, because income taxes are going to be created by what you spent, right? So, in other words, if you have to take money out to cover your cost of living, from an IRA that will create tax, right, or from a 401(k), that creates a tax, but that. Tax is determined by how much you’re going to take out to cover your cost. Okay, so the taxes we want to set aside for just a moment, income taxes, so we want to include everything in that cost of living number. And you know, many times when, when, you know, I visit with prospective clients and they say, you know, I ask them, what’s your cost of living? How much do you think it’s going to cost you? They go, Oh, $2,000 a month. And I say, Okay, well, does that include travel? No, it doesn’t. Okay. Does that include entertainment and all that? Well, no, it doesn’t. And does it include gifts to charity, or maybe you’re going to give gifts to the church, to your church? No, it doesn’t include that. What about your greedy, unwashed, undeserving heirs. What about your kids? Are you going to give them any money? Well, you know, we want to help them out. Okay, so we need to include all of that in the cost of living number. Because if we’re going to, if we’re if we’re going to build out what the magic number is, we have to include in that everything that you spend money on. Because, as I’m going to describe here, as we walk through the process, you’ll find that that’s a very important number. So the other thing that a lot of times people don’t take into account is property taxes and insurance that come around once a year. So they, you know, people will calculate, this is my monthly cost, and then, well, what about your property taxes that come around once a year? Oh, yeah, okay, we need to add that in too. So we need to basically incorporate everything that you’re going to be spending money on so that we can figure out how much money you’re going to need to support that. Because you may not consider gifts to charity or giving to your kids or your grandchildren to be a part of your cost of living, but if you’re going to do it, we need to be able to cover for that, right? So we need to make sure that you have enough money so that we can cover for that. Okay, so you add all that together, and guess what? You got all your expenses, awesome. And I’m guessing property tax is probably one of the biggest ones that people don’t think about. Yes, and insurance premiums for their cars or whatever they come around once a year. Yeah. And, you know, the exercise that we go through is called a retirement cash flow plan. You know, with clients, we build for them and prospective clients, we build the retirement cash flow plan. We call it an RCFP, for short. And so in building that, I can tell you that I’ve had many people tell me that it ranges from, it was an extremely painful exercise, I had no idea, you know, of what my expenses, you know, and having to go through all of that, and pulling the credit card statements out, and having to go because when people are working and they’re kind of in a normal groove, they don’t really, you know, a lot of times you don’t really think about what your expenses are. You just spend what you got, kind of thing. But now you got to put it down on paper and figure out the amount. So it goes from very painful to easy for our super anal, you know, our engineers and our, you know, our financial types. But I can say that from beginning to from from each end of the spectrum, the exercise is very well worth going through. It’s very valuable to go through that because then you start asking yourself questions, you know, do I need to be spending money on this? You know? Are there places where maybe, you know, I’m wasting money, you know, or things that I’m paying for that I don’t need anymore, you know, that kind of stuff. So do people, whenever they put it down on paper and they really put eyes on it, do they then go, well, in retirement, I’m not going to spend as much on X, Y or Z. Do people make an adjustment for retirement in that kind of way? You know, that’s a really good question. If you look at a lot of the I guess the tips on this, they usually tell you, Well, you know what, once you retire, figure your expenses are going to be 60% or some percentage before you retired. Well, I take issue with that, because whatever your cost of living is, how are you going to cut it by 40% you know? I get that you’re not going to go, you know, you’re not driving to work anymore. You’re maybe not buying lunch every day at work. You know you don’t have to keep your nice, fancy shirt and tie going and all that kind of stuff, but you’re gonna replace it with golf, and you’re gonna replace it with travel and spoiling your grandchildren. So you know, it’s not as this rule of thumb. I don’t know where it came from, where your expenses are going to drop by 60% because, you know, you now retired. I haven’t found that to be the case with clients. In some cases, their cost of living goes up, yeah. You know, traveling is not cheap, and, you know, playing golf every day or three or four times a week is more expensive than just on the weekend. So in some cases, their cost of living goes up. Yeah, that’s, that’s a very good point. You don’t stop living once you retire. No, you don’t, yeah. In fact, you’re going to start living once you retire. You know, we call retirement your second childhood without parental supervision, which, you know, we want you to be a kid again. We want you to go play and have fun and enjoy you. Don’t worry about all this financial stuff. You know, in the best case, let us worry about it for you. And so it’s gonna it costs money to do that. So part of the expense thing also is to figure out, okay, what am I also going to be spending money on that I had not thought of? So for example, am I going to travel? And if you’re going to travel, are you going to travel? Five? Star, three, star, one, star, you know, you’re gonna, are you gonna backpack it and sleep, bag it, or are you gonna stay at the Ritz Carlton, you know, that kind of stuff. What about, you know, so all those kind of things. And, you know, one of the things that that we do is we walk, you know, prospective clients through that process. Because a lot of times you don’t think of everything, and you don’t kind of process. Of process all of that. But we, like I said, we have people who are anal retentive, and they come with, like, spreadsheets of spreadsheets, like, this is the spreadsheet, but there’s a tab for every line on the spread. There’s 100 tabs, and they got it all worked out. And so that’s fantastic. But those people are probably 20% Yeah, the other 80% you know, it’s kind of like, I had one client. They brought in basically a shoe box. It was like with, with all their expenses, you know, receipts and credit card statements and everything else, for the whole year, they just brought the whole thing. Okay, we’re gonna go through this with you. We haven’t both figured this out so and the important thing, you know is to, is to understand that that, you know, we always say we want to have more fun than a human being should be allowed to have. So this shouldn’t be looked at as a daunting process, you know, where it’s like, oh my gosh, I got to do this. It’s fun, you know. And if you think about that, you’re, determining your cash flow, which is an offshoot of this and for a different program. But for today, it’s a very important number to figure out what your magic number is, to know if you can retire and if you have enough to do that. So step one was essentially, how much money are you bringing in, yes, and then how much money will you be bringing in right in retirement? Step two is how much you spending, how much you going to be spending, and then finding all those little hidden gems in the way that you’re subscribed to. I think of it like a subscription. I’m subscribed to something I’ve totally forgot about. It just on a credit card. And then, yeah, what do you find? A look at you’re like, I’ve been paying for that for three years. Like, what the heck am I doing? I found out, I’m embarrassed to say, that I was subscribing to one of those music things, yeah, and I never go on it. There’s like, two major ones. I was using one of them, but not the other, but I’m paying for the other. So I asked everybody in my family, is anybody using this? And I was like, no. So there was, I think, $15 a month that I could get rid of. And, you know, you may think that $15 a month is nothing, but it is something, as you’ll see in a minute when we go through the the actual calculation, the the numbers that you use for the magic number, you know, even $180 or $200 a year, it translates into a large amount of money to support that $200 Absolutely. Okay, so I guess the big third step is figuring out if you’re positive or negative yes. And so what you do next is you take your income and you subtract from that your expenses, right? And if you’re like 99% of our clients, what you’re going to end up with is a negative number mean, meaning that your expenses are going to exceed your sources of income during your retirement, you’re going to have more expenses than what Social Security brings in, and maybe your part time work, and maybe the rich uncle and all those kind of things.

That seems like a daunting thing to see if you’re planning on retiring. Well, it’s an eye opener, and it does cause several exercises, you know? I remember one time I was talking with a prospective client, and usually when people do what I’m about to say, you never see them again, right? You know? But they said, okay, so they looked at it and they were there was like a $40,000 difference, because, you know, he made a lot of money, and so they were spending a lot of money. But once they retired, and they didn’t have the income from wages anymore, you know, they had like a 40,000 I said, Okay, well, you know the magic number, the amount of money you have will not support, you know, that extra money. And so they said, well, then what do we need to do? And I said, Well, let’s kind of look at all this stuff. You know, what needs to be, what needs not to be? What can you do? And they said, Okay, we’re going to work on it. Get back to you. And my experience with that one is, we’re going to work on it and get back to you. A lot of people don’t do that, you know? It’s like they just go away and they say, all right, where they shot the messenger guy, they’re driving home. They’re thinking, man, we hate that guy. Let’s go find somebody else who won’t tell us that. You know, we don’t want to hear bad news. But anyway about So, I kind of, you know, put it on the list of they’re not going to come back, you know, sure. Okay, fine. And about six months later, you know, I saw them on my calendar. And I was like, Oh, they’re back. They were incredible. They listed their house. They were going to downsize. They canceled the fancy Country Club membership because he wasn’t playing golf anymore because his knees hurt. I mean, they made some drastic changes, you know? I mean, it was like, incredible. And they cut that thing by almost two thirds, and they were so proud. I’m like, Man, you guys are like, I should, I should take a picture of you and make you the poster children of discipline and act I mean, they went at it. Now, everybody’s not like that, but there’s a moral there, you know, and that is that understanding the first step in solving anything is fully understanding what the challenge is, right? That’s involved with that. So, yeah. So once you have that negative number, it is an eye opener. And then you start saying, Okay, well, How am I going to get that No, where do I get that difference? Yeah, yeah, either cutting costs or adding income, yeah. So, well, there’s three things. One is you can cut costs. The other is you can add income. You can work part time. You know, a lot of times clients, when they retire, their companies, appreciate their experience and you know their knowledge and what they were doing, and want them to work part time. They can find, you know, work that they can do, that they enjoy, believe it or not, we have clients who want, who want to, you know, the old joke about being a Walmart greeter, yeah, they want to do that. Yeah, you know, it’s like, I enjoy people. I want to go do that. So we have, you know, not a lot, but we have some that do that. So the thing about it is, you know, you could do that. The third thing is your investments, okay? And that’s where the magic number comes in. So your investments are probably where you’re going to make up that shortfall. Okay, so you’ve got your income, you subtract from that your expenses, and now you have a negative number, right, right? Your expenses are greater than your traditional sources of income. So now you have to make that up, and that is your investments, gotcha. So how do I find out what that number is? How do I find out what that needs to be, okay, to make up that difference? All right? Well, I’ll give you an example. Let’s say, let’s say you’ve gone through that whole process, okay, and you figured out that your expenses are going to end up being $2,000 a month more than your income, all right? So you take that number, that 2000 and you multiply it by 12, so that gives you $24,000 a year that you have a shortfall. Okay, so now that you know that number, then now you have to say, you have to translate that into the magic number, right, right? So you have to say, how much, how much money do I need in a big pile to generate that 24,000 that makes up the difference between my income and my expenses, right? Okay, so that’s come from your investments. And so the way you do that, if you apply what’s called what you know, the rule of 4% right? You take that number and you multiply it by 25 or you divide it by 0.04 Okay, gives you the same answer, right? You’re dividing it. You can either divide it by 4% or you can multiply by 25 either way. So in the example that I’m using of 24,000 you multiply that by 25 and it gives you $600,000 okay, so Said another way, if you have $600,000 and you’re taking 4% of that out every year, that’s $24,000 that you’re now going to use to supplement your Social Security and other sources of income to cover your cost of living. Gotcha, okay. And that makes a lot more sense than why you would have a negative number and you could still be okay. Yes, the negative number, in and of itself, is not a problem. Gotcha. You know, it does illustrate, as I said earlier, that maybe we need to get that number down. You know, in the case of the people I was talking with, you know, they looked at me and they said, in our lifetime, we’ll never get to that magic number. So we need to fix, you know, we need to look at what we should do. And there are lots of options, you know, it’s not, it’s not the end of the world. If the magic number is, is, is a number that you don’t feel you can get to. And, okay, so we have the annualized number that we’re it’s kind of like a snapshot. How do we use that to plan ahead? How do we use that to plan 510, 1525, years in the future? Yeah. So that’s where the RCFP comes in, the retirement cash flow plan. So that gives you the magic number, right? And so and again. Nothing’s guaranteed. You know, life happens in different ways for different people, the markets, etc. So we call it a magic number, but it’s not a guaranteed number, but it’s one that we have a great deal of confidence that if you have that magic number. Then you can retire, you know, and it’s likely not guaranteed to be careful compliance is watching, but it’s likely that you can support the lifestyle you want. The thing that you also that having the knowledge of that is that if you don’t have your magic number, you know, what are we going to do about that? Right, right? So at that point, the conversation becomes, do you work longer? You know, maybe you wanted to retire, you know, next year, but, but you’re not going to be able to or, as we said, you know, like the clients I mentioned, you go and you cut expenses left and right, and you, you know, you downsize, and you do this and that, we’ve had clients move out of the big city into the country, you know, where their cost of living is a third of what it was when they lived in the city. You know, all those kind of things are part of what this exercise brings out so as to get to that magic number. But if, if you don’t want to downsize and move to Arkansas and cut your cost of living and all those kind of things, then the next step is to say, Okay, well, then you need to work longer. Yeah, right. I mean, something’s got to give. Yeah. And so now we look at, okay, well, how much do you need to earn? Sometimes you don’t need to earn. You know what you’re earning. Now you may be able to quit that job because it’s stressful, you know, I had one client that, in fact, she worked for a company where, you know, they, they were bought out by another company, and the new people were these dictator, you know, Darth, Vader types, you know, they was horrible. She hated it. Total awfulness for her. She was so stressed. She thought she was going to, you know, she had such anxiety that she was starting to take, like, you know, anti-anxiety medications. And she thought she was going to have a heart attack. And, I mean, her skin was gray. And I was like, my goodness, you know, have you thought about, like, not working there? Well, I need the money. I have to have it so, you know, once you calculate the magic number, now you can say, Okay, well maybe you don’t need to continue making, you know, the max income that you were making. Maybe you can quit doing that and you can do something else. And so we can calculate, well, how much do you need to make? And in her case, it worked out to be that she could make half as much as she was making, and work another three years. And I asked her, I said, Is there something that you could do for the next three years that you would love doing that that wouldn’t make you what you’re making now, but it would, but it would get you to the magic number? And the answer was, yes. She likes, anyway, I won’t go into specific, yeah, but, anyway, yeah, so she did it. And, you know, so, so, but again, all of these things are what happens when you first understand what the challenge is. Yeah, you know, what is it that we’re trying to solve for here? So that’s Yeah, yeah, knowing the rules, knowing the equation, goes a long way to filling in the blank. So, you know, solving for x, essentially yeah, now to your question about looking into the future, 510, 1520, years. So what that goes into, and I think it’s a subject for a different show, is figuring out what return on investment we need to earn to compensate for the fact that there’s going to be inflation, you’re going to pay taxes, you know, all those kind of things, and how much Social Security you have. So those that’s part of the retirement cash flow plan that we do. But that’s looking into the future beyond the magic number. The magic number is where your starting point, and then the maintenance of that magic number and the growing of it to support the lifestyle you want is the next step after that. Yeah, and one thing we put aside at the very beginning, there was taxes. Said, we’re going to put that to the side for now. Is it time to bring that back in well, taxes are part, yeah, that’s a good question. The taxes are part of the retirement cash flow plan, yeah, okay, because your investments need to cover for your taxes, the income you’re going to the you know, your total income and what you spend is after you’ve taken taxes out, right? So you do have to compensate for taxes, and the retirement cash flow plan does that, right? But as I said before, the challenge with the income tax number is it’s a variable cost, meaning that it is driven by what you spend, right? So they kind of play with each other, but you have to start with how much you spend, and that generates that so that’s why we don’t include it in the cost of living. It’s a separate line item. It’s an important one, it’s a big one, but it is not part of the cost of living. It’s a different number. Okay, is there anything else that is important to really finding out and knowing your magic number? Yes, there’s something very. Important, and maybe, you know, it overrides everything I just said, Yeah. And as our audience may know, you know, we don’t think that buy and hold is a complete strategy. We think you should also have a sell strategy. You should get out and protect your money when bear markets come. And we’ve had other episodes where we’ve talked about, you know, our invest and protect strategy, but knowing what your magic number is is important, because it tells you the number that you have to defend. Okay, so let me give you an example. My favorite number is a million dollars. So I’m going to use a million dollars as an example. Okay, so let’s say that your magic number is a million dollars. But you’re really fortunate. You have $2 million okay, so you got twice as much as your magic number says. So what that means is, is that you could afford to lose, I mean, you don’t want to, okay, don’t get me wrong. And nobody wants to lose a million dollars, but you could lose a million dollars and you’re still okay, because your magic number is $1 million but if you have, let’s say, a million and a quarter, or, you know, a million and a half, you can’t lose a million dollars and still have your magic number, right? Because if your magic number is a million, and you have a million and a half, you lose a million dollars. Now you got 500,000 you’ve got half your magic number. So there’s, there’s a there’s a side benefit, which I which, you know, we believe if, if the money is going to support you for the rest of your life, then, you know, protecting that money that’s going to generate this income for you. We think is extremely important. You know, growth is important, but protection of principal more important. And so understanding what your magic number is then also says, Okay, I’m getting close to that number because if you get below it, then guess what it means that the whole if you do the math, if you get below it, then you can’t generate the income that you want to support the lifestyle. And then we go back to the same questions, what do we do now about that? Well, we got to start cutting costs. We got to start doing less of this. Maybe we cancel that trip we were going to take, you know? Maybe we don’t buy gifts for the greedy, unwashed, undeserving heirs of ours this year, you know. So there’s a lot of things that come from if you get below your magic number. So knowing what it is also gives you ability to know, you know, I need to start being careful here, or I need to look at my investments and and, you know, make sure that I don’t get too far below that number. Yeah, yeah, that’s if you don’t have anything generating income for you to make up that difference in your revenue and expenses. I’m sure that puts a lot of people in a bind, and I don’t think that’s anyone that wants to be in a bind like that, especially in retirement. Yeah, and not knowing that, and then suddenly finding yourself in that place is not fun, you know. And through the years, you know, I’ve been doing this, gosh, I don’t want to say it, but I will, 30 years almost, I’ve met a lot of people that have found themselves in that place because they had no clue. They didn’t know that they had a magic number they had to defend. And then all of a sudden, you know their investments dropped, and suddenly, you know they have half of what their magic number is, or two thirds of it, or something like that, and or they’re spending too much, and they’re getting below their magic number because they’re spending too much. So knowing what that number is helps in a variety of places. You know, both from how much you spend, how much you need to protect, how you invest it has consequences in all parts of your retirement planning. Is that something that people should be cognizant of? Should they revisit that calculation on a pretty, like regular basis? Yeah. So when we do the retirement cash flow plan, we want to update it at least twice a year. And the reason why is because, you know, a lot of stuff changes. You know, people lives. You know, life happens and expenses show up that weren’t there before opportunities show up. You know, we just found out, you know, that a bunch of friends want to, you know, go to Paris and we want to spend a lot of money on that. Can we afford it? You know? How does that affect our magic number? Yeah, so updating it is really important. Tax laws change, you know, and the rules around Social Security change. There’s all kinds of stuff. Medicare changes, you know, premiums change. So there are lots of things that impact your retirement cash flow and therefore your magic number. So yeah, making sure that you know one of the things about retirement planning, it kind of reminds me of the difference between an arrow and a guided missile. Yeah. So with an arrow, when you point it at the target, when you let go, all the information that arrow is ever going to have is in it already. And once you let go, that’s it. It’s not getting any more. So when that arrow is going towards the target, if suddenly there’s a strong breeze that comes along, or somebody moves the target, then that arrow doesn’t know to change, because it has, it only has the information from when you let go, and it’s going to keep going in that direction. And it could miss a guided missile or a heat seeking missile. Maybe is a better way of saying it, you know, it’s going to adjust. It’s going to keep searching for that target as it moves. And that’s what financial planning, retirement planning, what, knowing what your magic number is. That’s what that’s about. It’s, it’s, you know, every, every six months, ideally, you want to reassess, put new information in and re, re-target your missile, absolutely. Yeah. Then somebody that doesn’t have, that doesn’t have that guidance, I would feel they were they’re going to be at a very big disadvantage, especially when they’re approaching that retirement age and then the first five years after retirement.

Yeah, that’s very true. And you know what we say is we want your money to last as long as you do, and so for your money to last as long as you do, we need to know how much money you need to have to start with to support your lifestyle. Yeah. And so it all starts there. That’s the beginning of it all. And it’s fun. You know, we always, like I said, we want to have more fun than a human being should be allowed to have when talking about all this boring financial stuff, that’s one of our core values.

Absolutely Ken, what is the major takeaway? Or what are the major takeaways for the magic number in that calculation?

 Yeah, so the takeaways are that it’s a five step process. One is to figure out what your income sources are going to be. Next is, what are your expenses going to be? Subtract your expenses from your income. Most likely you’re going to get a negative number. That negative number you take it. Usually people come up with a monthly number. You want to annualize it so you multiply it by 12, and that’ll give you the annual shortfall that you’ll have. If you’re like most people, you multiply that by 25 and that gives your magic number. Now if it comes if you do this exercise that comes up with a really big number, don’t despair. Okay, there are lots of ways to skin that cat. There’s lots of ways of still getting you there. So don’t lose don’t lose hope if it’s if it’s a bigger number than what you thought it would be. So those are the important thing. The magic number is important, tells you whether you are able to retire yet or not, tells you the number that you can that you need to protect so that you don’t get below it. Lots of great things that come from that. So I hope you enjoyed this program today. Subscribe to get more about 401 ks and retirement planning. We’re going to do estate planning. We got lots of content that I hope you’ll enjoy. So we’ll talk soon.