Retirement is Not an Age; It’s a Financial Number” – Dave Ramsey

Do you have a specific age when you want to retire, like 60 or 70 or somewhere in between? If you are targeting a certain retirement age, you may be focused on the wrong thing — at least if you listen to finance expert Dave Ramsey. Based on Ramsey’s retirement advice, retirement isn’t something that happens at a specific age. Instead, you can retire only when you have a big enough nest egg to support you. 

Your retirement readiness, in other words, is not based on the fact you hit a certain milestone birthday. The financial number you need to look at is your investment account balance so you will understand whether you have the income that you need to live on or whether you must keep working longer until you acquire the right amount of invested funds. 

So, how can you find your financial number so you will know if you are ready to retire or not? Here’s what you need to do. 

Calculating the financial number that shows you are ready for retirement

There are a few different ways to calculate the amount that you must have invested to be ready for retirement. 

The first approach is the most accurate but the most complicated. It involves figuring out your exact budget and making sure your nest egg will produce enough income to cover it.  This is the best option if you are already very close to retirement so you can make an accurate assessment of spending needs.

Say, for example, that you anticipated spending $60,000 per year and you have $25,000 coming from Social Security. In this particular situation, you would need your nest egg to produce $35,000. Once you know your income needs, multiply that number by 25 if you plan to follow the 4% rule (a common way of setting a safe withdrawal rate). The 4% rule says odds are you will not run out of money during retirement if you only take 4% out of your account in your first year and adjust withdrawals annually based on the rate of inflation.

If you adopt this approach and your nest egg must provide you with $35,000, you would need $875k saved.  If you had that amount, you’d be ready to retire — otherwise, you wouldn’t be ready no matter your age.   

Now, if you don’t know your retirement budget, you could still use this approach by assuming you’ll need to replace around 70% to 90% of pre-retirement income. So if you were making $50,000 and wanted to err on the side of caution and replace 90% of it, you’d need your nest egg to provide $45,000 so multiplying that number by 25 reveals you’d need $1.125 million.

Another option available to you is to multiply your final income by 10 and make sure your nest egg hits that number. Say, for example, that you anticipated retiring when you were earning $100K. This would mean that your nest egg needs to be around $1 million so you could produce enough income to live on. Once you had $1 million, then you’d have reached your number. 

How should you determine your financial number?

Each of these different calculation methods can help you arrive at the financial number you need to retire. There’s no one method that’s best, as it depends on where you are in your life and how good you are at anticipating your future spending needs. 

Still, the bottom line is that Ramsey is right. No matter how old you are, if you can’t hit your target number and generate enough income to support yourself, retiring is likely a bad idea. Instead, it’s best to keep working and saving for a little longer to build up the nest egg necessary to have the security you deserve.