When it comes to timing your retirement, only two questions matter

The names in this true story have been changed to protect the innocent.

At our Mother’s Day BBQ, the conversation turned to finances and Facebook’s IPO. The consensus among family members was that nobody was going to buy IPO shares in the company. But Aunt Marsha told me that a friend of hers was considering moving her entire 401k savings into shares of Facebook, at which point I almost choked on my BBQ Salmon. I explained that putting a large portion of capital into any single company is too risky, and advised Aunt Marsha’s friend to put the money in a low-cost index fund, and keep it there.

Then Aunt Marsha said, “Thanks for letting me know, because she’s got a lot of money in her 401k. Like $30,000.” Keep in mind Aunt Marsha is almost 60 and her friend is approximately the same age. We got to talking about what it means to have that amount saved up for retirement at that age, and I explained the following:

Anybody can retire at any time they want, but there are two variables in the “can I retire?” equation:

A. How much do you plan to spend per year in retirement?

B. How much do I have saved up?

If the answer to Question A is 4% or less than the answer to Question B, then hand in your pink slip! Otherwise, you don’t necessarily need to keep working (but you probably will need some more capital somehow). You can:

1. Minimize spending.

2. Maximize income.

3. Increase savings rate.

4. Go into partial retirement (which will probably reduce spending but will also reduce income). I’ll write about this last one (including a book review) later.

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