The big 12 numbers of retirement

There were 12 apostles. There are 12 months in a year. 12 inches in a foot. 12 numbers on a clock. And 12 eggs in a container. I guess it shouldn’t surprise us that our friend, Paul Merriman, has come up with the big 12 numbers of retirement.

The big twelve

Paul is a former investment advisor, founder of an advising firm, host of an award-winning podcast, and, most of all, a gentle giant of the investing community. He has a passion to teach people how to provide for their financial future and leave a financial legacy. In his best-selling book, Financial Fitness Forever, Paul lists the big twelve numbers everyone needs to know. In shorthand mode, I’d summarize them as:

  1. Your current cost of living
  2. The rate of inflation
  3. Your number of years before retirement
  4. Your inflation-adjusted future cost of living
  5. Annual retirement income expected
  6. Annual retirement income needed
  7. Size of your total portfolio needed
  8. Size of your total portfolio now
  9. How much you’re adding each year
  10. Annual return you’ll need to bridge the gap
  11. The percentage of stocks in your portfolio now
  12. The amount of risk in your portfolio now

Paul will walk you through these calculations in this article or much more completely in Chapter 10 of his book Financial Fitness Forever, which he graciously allowed us to link to. Though he makes these calculations quite clear in his writings, what Paul couldn’t anticipate was the extra steps an American expat is going to have to take. Please allow me to walk through Paul’s “big 12” with a few comments that we US expats need to keep in mind.

The expat math

1. Current cost of living
Example: $122,000

This is the foundational number. Paul’s writes,

Everything else in this exercise is based on this. I’m assuming you will want to continue something like your current lifestyle after you retire, so this won’t be too hard. Start with your household’s gross income and subtract only the money you’re saving each year for your retirement.

Paul Merriman, Twelve numbers you need to know for retirement

For the sake of consistency, we’ll use the figures Paul uses in the 10th chapter of his book. There he assumes a two-income household, pulling in $146,000 per year. We’ll call this couple “John and Jane Stateside.” The Statesides put aside $24,000 of that for their retirement, so their current cost of living is $122,000 ($146,000-$24,000). For most US expat teachers, missionaries and the like, that may be a very high estimate, but it will serve us well as we follow Paul’s steps. Please adjust to whatever is true for you.

2. Rate of inflation
Example: 3.5%


The figures used by Paul and most US financial writers is between about 3 and 3.5%. However, if our plans are to retire in a particularly high-inflation country, we’re going to have to make some interesting adjustments here. We’ll have to bear that in mind, but let’s stick with Paul’s figures which are solidly rooted in past US inflation rates.

3. Number of years before retirement
Example: 12 years

This sounds simpler than it is. Your organization might have a mandatory retirement age. Your health or your parents’ health might necessitate a change in plans. In 2016, USA Today posted the headline, “60% of Americans have to retire sooner than they’d planned”! That seems a bit high, but it should still make us wary of assuming we’ll be charging ahead in the expat workforce into our 70s and 80s.

We’ll assume John and Jane Stateside have 12 years until retirement, but your time frame might be much longer or much shorter.

4. Inflation-adjusted future cost of living
Example: $124,000

This number is hard to come up with. In Chapter 10, Paul explains some of the moving parts:

Some people plan to move…. You may find yourself with much more time to pursue hobbies and travel…. You’ll probably pay less for commuting and clothes, and you won’t need to keep contributing to your retirement plans…. You won’t have to pay Social Security and Medicare taxes any more.

Paul Merriman, Chapter 10 of Financial Fitness Forever

As complicated as these guestimations can be for John and Jane Stateside, they are much more so for the average American expat. Let’s consider some scenarios. What if we plan/dream/need to live…

  • closer to our aging parents in Minnesota.
  • near our bouncing-baby grandchild in Colorado.
  • in one of the world’s tax havens or inexpensive paradises.
  • in a tax-heavy, expensive region of Western Europe.
  • right where we are in our current host country.

In all but the last situation, an expat’s current cost of living might not be a good indicator of his or her future cost of living. You can’t compare living in a hut overseas to living in a starter home in Missouri. You also can’t compare the lifestyle you had as a teacher to the rich-and-famous of Europe to your retirement to an expat enclave in South America. There is no simple comparison to be made. The number you came up with in step 1 may not be overly helpful in these cases.

Vagabond Finances suggests this: Make your best guess at where you hope to be in retirement and then do some research on what it costs to live there today with the lifestyle you want to have in retirement. Whatever you do; don’t under-estimate this figure. You don’t want to come up drastically short on this number. Ask a friend in Denver, Paris, Seoul, or Tijuana what it costs them to live there. Take a look online at standard of living figures for retirees where you hope to live. Make a guess, check it again, and then add a bit more for good measure. And don’t forget one time needs such as possibly purchasing a home, vehicle, etc.

Make your best guess at where you hope to be in retirement and then do some research on what it costs to live there today!

For simplicity, we’ll continue to use Paul’s figure of $122,000 from step 1 as our starting point, but YMMV (your mileage may vary)! Paul makes the following adjustments looking toward John and Jane Statesides’ the future:

To your current $122,000 cost of living, I am going to add $5,000 to cover what I assume will be higher health care costs plus another $3,000 for travel in addition to whatever you are spending now…. That brings your total to $130,000.

On the other hand, I estimate that you can subtract $6,000 that you will no longer have to pay for commuting and various other business costs. I also subtract $10,000 in Social Security and Medicare taxes. You have nine years to go on your mortgage, which will be paid off three years before you retire. That will save you about $32,000 a year in retirement. In addition, as I complete another step in this process I will assume you will add that $32,000 to your retirement savings for the last three years.

Paul Merriman, Chapter 10 of Financial Fitness Forever

Do all of those things apply to you? Of course not! But it helps to see what some of the additions and subtractions might be. The net of all those changes results in a need for $82,000 in the first year of retirement. Now, let’s convert today’s $82,000 into future dollars.

Using Money Chimp’s Free Calculator for compound interest, you’ll see that $82,000 at 3.5% inflation for 12 years results in a first year need of nearly $124,000. (That seems like a lot because it is in future, inflation-adjusted dollars.)

Instead of calculating Paul’s first number as your current cost of living, calculate what your current cost of living would be if you were living today in ___________. You fill in the blank. Let’s call it “Somewheresville.” Now, go back to Money Chimp and enter today’s cost of living in Somewheresville, the inflation rate you expect, and your years before retirement. As if by magic, you will see before your eyes your personalized, future, inflation-adjusted cost of living.

We’ll continue using Paul’s $124,000 in this article, but you just fill in your personal number as we go along. The hard part is done. So let’s knock out these last seven numbers.

5. Annual retirement income expected
Example: $49,000

This probably includes Social Security…. If you own rental property that you intend to keep, it can include rental income. This number should not include…interest, dividends or capital gains. We’ll account for that later.

Paul Merriman, Twelve numbers you need to know for retirement

American expats rarely have a company pension or annuities (and both of those can cause tax problems of their own). In the place of Social Security, you might have a host country’s old age pension or you may be using a Totalization Agreement to combine the two. Please note that some countries will tax your Social Security and others won’t. You’ll want to know those things.

Paul’s example in his book is that John and Jane Stateside can expect an annual retirement income of $49,000, so we’ll stick with that number. Again, YMMV!

6. Annual retirement income needed
Example: $75,000

You don’t have to be a braniac to do this calculation. Subtract your estimated annual income (step 5) from your desired annual income in the future (step 4) to get the annual retirement income you are still in need of. In this scenario, $124,000 – $49,000 means that the Statesides need to provide for themselves an additional annual retirement income of $75,000. Here’s hoping your number (and mine!) is much smaller.

7. Size of total portfolio needed
Example: $1,875,000

We’ll not get into it here, but there is a very reductionist rule of thumb that our entire portfolio (the combination of all of our investments including mutual funds, ETFs, bonds, CDs, savings whether they are in retirement accounts or normal taxable accounts, etc.) should be valued at about 25 times our annual need when we retire. So $75,000 (or, hopefully, your much smaller number!) multiplied by 25 would suggest that the money you set aside needs to reach $1,875,000. That’s the bad news. The good news is found in Paul’s 8th of 12 numbers.

8. Size of total portfolio now
Example: $510,000

Paul is assuming that John and Jane Stateside are probably in their 50s, so don’t let this number scare you if you are a 25-year-old expat teacher. Paul writes:

This number should include only your investments, excluding real estate and other non-liquid assets…. I’m going to assume that you have been aggressive savers and your portfolio is worth $510,000 right now.

Paul Merriman, Chapter 10 of Financial Fitness Forever

Yes, Paul, that is pretty aggressive. Still, it’s nowhere near the $1,875,000 we’ve set as a goal for the Statesides.

9. How much you’re adding each year
Example: $24,000

The Stateside family’s number is no surprise because we’ve had it in our back pocket since the very first step. They were setting aside $24,000 per year. In 12 years, that would add another $288,000 to their portfolio, but that’s still well short of the goal. Maybe they (and we!) can’t just put this money under our mattresses after all.

10. Annual return needed to bridge the gap
Example: 8.1%

Perhaps, like me, you are feeling like all hope is lost for our fictional friends, John and Jane, but not so fast. Our wisened advisor says:

Based on the numbers that we just outlined and your goal of having $1,875,000 in 12 years, my calculator tells me that you can get there if your money grows at an annualized rate of 8.1 percent.

Paul Merriman, Chapter 10 of Financial Fitness Forever

Wow! 8.1 percent!?! Paul Merriman says it can be done, but who is he kidding? Banks aren’t paying 8.1 percent interest!

Bank savings alone isn’t likely to bridge the gap.

Now, before we move on, we need to confront a problem here. This annual return number is not easy to calculate. Sure the Stateside family has a pretty straightforward situation and Paul has financial software to help with these calculations. We don’t have that software and we’ll want to account for one time needs such as moving Stateside (or elsewhere), buying a home, purchasing a vehicle, etc. that John and Jane don’t have to think about.

There are too many moving parts here, and Vagabond Finances isn’t aware of any online calculator to do this for you easily. As with many other financial planning problems, you might want to get in touch with Mark Zoril for advice and the use of his premium eMoney software. (No referral paid.)

Trusting that our own annual return rate is no greater than 8.1%, we’re still left with the problem that our bank accounts are paying far, far less than that, and therein lies the problem for many of us. If we’re thinking that earning and saving alone are going to set us up for retirement in the USA, we’re probably deluding ourselves.

Josh Johansen writes, “You can’t ‘earn’ your way to retirement.” The average American and certainly the average expat American is never going to earn and save enough to retire to the lifestyle they desire. It takes more than earning and saving.

If our numbers are anywhere similar to the ones Paul is throwing around here, then we’ve come to a fork in the road. To the left is a sign that says, “Earn and save.” Earning a modest expat wage as many of us do and putting our savings into bank savings accounts will likely never get us to the retirement we desire. Whether you hope to retire in order to be a volunteer, to be a generous donor to charity, or to travel the world, the path that leads you to the door of So-So Savings and Loan isn’t going to get you there if you need a return of 8.1% or anything similar to that.

11. Percentage of stocks in your portfolio now
Example: 84%

If So-So Savings & Loan can’t get us to our destination, we’re going to have to veer to the right and take a peek inside the Better-Bargain Brokerage. Before you open that door, be sure to be repeating to yourself, “Only broadly diversified index funds! Only broadly diversified index funds! Only broadly diversified index funds!” Don’t become a gambler; become an investor in the economy of the US and of the world!

But can investing in the the US and world economy really produce 8.1%? Paul’s research shows that it historically has:

From 1970 through 2010, a relatively low-risk portfolio with 60 percent in properly diversified stock funds and 40 percent in bond funds achieved an annualized return of 10.6 percent – definitely higher than the 8.1 percent you need.

Paul Merriman, Chapter 10 of Financial Fitness Forever

Many economists think that gains going forward might not be quite this stellar, but the truth is that no one knows. The point is this: If you need to have returns like 8.1%, you’ll need a good percentage of our money invested in the stock market. However, if we only need returns of 2 or 3%, then CDs, savings, bond funds, etc., will be just fine with less risk.

As Paul tallies up John and Jane Stateside’s portfolio of, yes, widely-diversified index funds, he discovers that of their $510,000 nest-egg, 84% of it is in widely-diversified stock index funds.

12. Amount of risk in your portfolio now
Example: Are you ready for a 43% loss!?!

Could you stomach a potential 43% loss? Well, as you might have intuited already, the Statesides don’t need to take on the risk of having 84% of their present and future investments in stock index funds. Moving some of that money to bond index funds (or even CDs, etc.) would probably be a prudent move. In his article, Paul notes:

To show how important this is, let me give you just one example. If you have 80% of your portfolio in stock funds, you are exposed to the risk of losing nearly 43% of your portfolio in any given 12-month period.

Paul Merriman, Chapter 10 of Financial Fitness Forever

Will your portfolio bounce back? Probably. But will it bounce back before you hit, “Sell,” or before you need to withdraw funds in retirement? Why run the risk when you could easily mitigate the risk by holding more bonds (or bank savings)?

On the other hand, you might need 8.1% returns and still haven’t moved passed So-So Savings and Loan. The low percentage return you are getting there or in bond funds is unlikely to get you anywhere near the returns and retirement you desire. You’ve taken very little market risk, but now it is your future at risk. It may very well be time to move some of those bonds or cash into widely diversified stock funds. The sooner you act, the more time you give for your stock funds to grow and for that growth to compound.


Paul Merriman’s “The big 12 numbers of retirement” is an easy-to-digest method of getting our future planning on track. We’d strongly encourage you to read through Paul’s article on the Twelve numbers you need to know for retirement and Chapter 10 of Financial Fitness Forever.

However, we also hope that we’ve helped you see that American expats have a lot of twists and turns along this 12 step path. Estimating the costs of a move to another country, the purchase of a home in retirement, the cost of living in another country, etc., are beyond difficult.

Paul offers this piece of advice near the end of Chapter 10:

Here’s my final recommendation: Get a professional to help you with these things. If you are using a financial advisor or you’re thinking of hiring one, he or she should be able to help you with all these numbers and then figure out the appropriate action plan. This is a huge benefit of having an advisor.

Paul Merriman, Chapter 10 of Financial Fitness Forever

Given the complexities of expat finances, we’d encourage you to find a financial advisor with expat experience and with powerful software that can accommodate your situation. If Mark Zoril and his eMoney software don’t fit your needs and your employer doesn’t offer a qualified, experienced financial planner, then find one on your own before these “big twelve numbers” become even bigger than they already are!

Mark Mason

Missions is my calling. Finances is my hobby. Helping you is my pleasure. "Mark" is my ultra-ego.