Setting long-term financial goals

I've been a long-time proponent of creating a budget and setting short-term financial goals. As a recent escapee of credit card debt, short-term goals have been the best tools to dig myself out of that hole. But during dinner last night, my wife and I were talking a little bit about our retirement and I realized that I had no idea when we could retire. All I knew was that we make decent money, don't waste too much on frivolous things, and try to pay cash for as many big-ticket purchases as we are able. Given our current situation, can we retire at 65? 60? 50?!?!

Because I'm no expert, I won't try and tell you how specifically to plan for your retirement. But I will share some results of exercises that I've been going through this morning. Ideally, I'd like to retire at age 50. And according to some initial calculations, I'll need to save a significant percentage of my income to retire at that age, assuming that I do not receive any social security. Of course, my lifestyle during retirement will affect the amount of money that I need to save. Assuming the following lifestyles (% of my current annual income, adjusted for inflation, that I would like to withdraw during each year of retirement), I will need to save the following percent before tax (assuming 8% growth before and during retirement):

• 70% of income: 32% savings
• 80% of income: 37% savings
• 90% of income: 42% savings
• 100% of income: 46.5% savings

Of course, those numbers assume that I will retire at age 50 and will receive no social security (mainly because the system is in the toilet and I don't want to rely on it). If I assume that I will receive social security benefits, my income/savings percentages change significantly:

• 70% of income: 23.5% savings
• 80% of income: 28% savings
• 90% of income: 32.5% savings
• 100% of income: 37.5% savings

One important thing to consider about these numbers is that they all reflect the minimum percent savings required to ensure that the money won't run out by age 90. Each percentage will result in a near-zero balance by age 90. However, by saving approximately 4% more than the minimum savings percentage required for my desired income, I will be able to draw from the account annually without decreasing the principal balance. Essentially, by saving for an 80%-income lifestyle and actually living a 70%-income lifestyle, my account balance will continue to grow indefinitely. Assuming that I save enough to live off of what is today $42,000 per year (70% of 60,000), saving an extra 4% annually will give me an account balance at age 90 of about $1.5 million. Not saving the extra 4% annually will leave me with a balance by age 90 of about zero dollars.

What I have learned from my research is this: I should figure out what kind of annual income I would like to have in retirement. Next, I'll save enough to make that goal, plus at least an additional 4%. It is that relatively small extra savings that will determine if I die rich or poor.