Editor's Note: This story originally appeared on Boldin.
Figuring out whether you can retire securely can sometimes feel like the most complicated math problem ever.
Just figuring out which retirement number to worry about can be perplexing.
And then there is the further complication of knowing how they all fit together.
Here is your guide to retirement metrics. Many of these are based on rules of thumb, and they may (or may not) be important to your own financial security.
1. Your Financial Independence Number
Financial independence (FI) is achieved when you have enough savings or passive income to cover your expenses for as long as you’ll live.
Most FI proponents suggest that you can achieve FI when you have amassed enough savings to cover 25 times one year’s worth of living expenses.
So, if you spend $100,000 every year, then you need $2.5 million to achieve FI. (Don’t worry if you intend to live much longer than another 25 years, the calculation assumes that returns on your savings will enable you to withdraw adequate funds forever.)
This FI standard may or may not apply to you depending on who you are now and what your future holds. For example, if you have a pension or you intend to downsize your home in the future, you may need less in savings to achieve Financial Independence now.
The best way to figure out when you can declare financial independence is by creating and maintaining a detailed financial plan.
2. Financial Independence or FI Ratio
Your Financial Independence or FI Ratio will tell you how close you are to achieving FI.
You calculate your FI Ratio by dividing your net worth by your FI number. The resulting percentage will mark your progress toward FI.
So, if you need $1 million to achieve FI and your net worth is currently $500,000, then you are 50% of the way to FI.
Your FI Ratio is a good way to measure your retirement readiness.
Note: Your FI Ratio is a good way to measure your retirement readiness. Discover your FI in the NewRetirement Planner.
3. Your Social Security Start Age
You probably know that the later you start Social Security, the higher your monthly benefit will be.
Even so, a lot of people start getting checks as early as possible because they think they will get more money from the additional years of collecting benefits than they will from a bigger benefit later on.
Did you know that the lump-sum value (the amount you could get if you were to receive all of your Social Security in one lump sum today) of your Social Security is likely to be greater than the total of all of your savings?
In recent years, the average lump-sum value of Social Security benefits has been around $300,000. The maximum benefit is around $575,000 for males and around $680,000 for females.
Compare these numbers to the average amount of savings held by a 66-year-old — $67,000 — and you’ll appreciate just how valuable Social Security can be.
4. How Long You Will Live
Another important retirement number is knowing how long you will live.
Estimating your longevity will impact your decisions about how much savings you need — the longer you live, the more life you need to pay for.
Of course, no one can really predict how long they will live. However, there are some good longevity calculators that can help you make a relatively good prediction — you may just want to add five or 10 years to any estimate just in case!
5. How Much Monthly Guaranteed Lifetime Income You Have
Guaranteed lifetime income — money that you will receive every month (no matter what) for the rest of your life (no matter how long you live) — is the real secret of financial security.
In fact, retirees who report having a guaranteed income that exceeds their spending report less stress and an overall happier retirement.
Common sources of guaranteed lifetime income include Social Security, some pensions, and lifetime annuities — add them all up to get this important retirement number.
Many retirees who have adequate savings buy a lifetime annuity to insure their retirement income.
6. Inflation Outlook
Inflation is an economic concept that describes the increase in prices. If inflation is rising at 4% annually, then something that costs $100 today will cost $104 a year from now, $108.16 in two years and it keeps accumulating.
Inflation can be less noticeable when you are working because your salary is supposed to keep pace with the increases in costs. However, inflation in retirement — when you are living off a fixed set of assets — is a whole other matter. You have a fixed amount of money that can buy less every year.
Here are some funny quotes that describe the dangers of inflation:
- “Inflation is when you pay fifteen dollars for a ten-dollar haircut you used to get for five dollars when you had hair.” — Sam Ewing
- “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” — Ronald Reagan
- “Inflation is the crabgrass in your savings.” — Robert Orben
Predicting inflation is an important component of preparing for retirement.
- According to this chart, inflation in the United States was at 3.3% in June 2024.
- That’s much lower than the highest rate of 13.29% in 1979.
- The average rate of inflation in the U.S. in the 21st century is 2.4%.
- Over the last 20 years, the average has been 2.49%.
- Two years ago, in April 2022, inflation was greater than 8%.
7. Rate of Return on Investments
If you have retirement savings, knowing how much that money will earn for you is important.
Ideally, you are earning a rate of return that is better than average. What is average you ask? The answer is, “it depends.”
After the downs of the pandemic, most market indices are at almost record highs again. But, those lows and recent highs tell the true story of average returns. You don’t want to calculate your long term financial projections using a too high rate of return or something too low.
Historic benchmarks for the S&P
The S&P 500, as we know it today, officially started in 1957. However, its origins date back to 1926 when Standard & Poor’s introduced the Composite Index, which tracked 90 stocks. The S&P 500 expanded this index to include 500 stocks in 1957, making it a broader and more comprehensive measure of the U.S. stock market.
Let’s take a look at some of the averages for this index:
- The average annualized return since its inception in 1926 is around 10%-11%.
- The highest annual return for the S&P 500 since 1926 was in 1954, when the index experienced a return of approximately 52.6%.
- The worst year was 1931, when the S&P 500 experienced a dramatic decline of approximately 47.1%. This significant drop reflected the severe economic challenges and market volatility of that period. Another notably poor year was 2008 during the global financial crisis, when the S&P 500 dropped by about 38.5%.
- Over the last 20 years, the average returns have been 10.8%.
- The average return over the last 10 years is 15.3%.
- Over the last five years it has been 16.4%.
As you can see, the rate of return varies greatly depending on the time period you are looking at. It will also vary greatly on the type of investment.
However, depending on how much retirement savings you have, predicting a rate of return can be critical to your financial security.
8. Out-of-Pocket Health Care Costs
This number is easy — if you want to go with averages and the opinions of various experts in the field.
According to Fidelity’s most recent Retiree Health Care Cost Estimate, a single person age 65 in 2023 would need more than $150,000 saved (after tax) to cover health care expenses in retirement. An average retired couple age 65 in 2023 needed more than $300,000 saved.
And, this does not include any money that may need to be spent on long-term care needs.
9. Estimated Monthly Retirement Spending
Knowing how much you will spend is another critically important retirement number. The more you will spend, the more savings and income you will need.
There are various ways to predict your spending. Different experts have different suggestions for figuring out your spending, some say that you will spend:
- 85% of what you spent while working
- The same as you spent while working
- More when you first retire, then less as you grow older
- Much less in retirement, because you dramatically cut costs to make ends meet
10. How Much Your Home Is Worth
Many 50-, 60-, and 70-year-olds today have put more effort into buying a home and paying their mortgage than they did into saving for retirement. As such, your home is an important source of retirement wealth.
More and more retirees are downsizing or getting a reverse mortgage as a way to use their hard-earned home equity to fund retirement.
11. How Much You Have Saved
This should be easy. How much do you have saved for retirement?
The trickier part is knowing how much those savings will be valued in the future.
When will you make withdrawals and for how much? What kind of rate of return will you get? Will you add anything to your savings?
12. Your Retirement Age
Retirement age used to be 65 for most everyone. These days we aren’t even sure exactly what “retirement” means anymore.
Many more people are quitting their job only to get another career or part-time gig. Other people are phasing out of work by reducing their workload before they fully retire. And retirees are more active now than ever before.
You might be able to define your retirement age as when you stop earning income from work, but then we get into the definition of work. Many people these days have side hustles and passive income sources.
So maybe the new idea of retirement age is the age at which you need to start really relying on withdrawals from savings to make ends meet.
13. Your Net Worth
Net worth is all of your assets (savings, home equity, and more) minus all of your debts.
Net worth is considered the most accurate measure of wealth. It is a precise number that is an accurate gauge of your financial health and it can be easily tracked.
14. Projected Estate Value
It is useful to know your net worth now; it can also be useful to know your net worth at your projected life expectancy. This is the projected value of your estate.
Knowing your projected estate value is useful for planning to minimize taxes and for making plans for your heirs.
15. The Value of Your Emergency Funds
If the past few years taught us anything, it is that we definitely need emergency funds.
A cash account may be the best source for a finite amount of money, but there are other ways to cover unexpected costs. Consider this guide to the best and worst sources of emergency funding.
16. How Much Savings You Need for Retirement
This is THE retirement number — the question that everyone wants answered.
Of course, the answer to this question depends entirely on your answers to all the other questions.
And the best way to get a reliable answer from this jumble is to use a good retirement calculator — one that is detailed and that can be completely personalized.
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