If you're focused on your total nest egg like many people are, there's a different number that’s more worthy of your attention. It’s a number that I believe is more meaningful and aligned with your day-to-day life. 

I’m referring to the amount of income you can withdraw each year from your assets to support your monthly spending, travel, etc. when you retire, need extra money, or take a hiatus from work. It’s highly unlikely that you will ever withdraw your entire nest egg in one year - the annual withdrawal number is a more practical number that directly impacts your daily experience. 

That number is approximately 4-5% of your total nest egg number. There are assumptions that underlie the amount of this percentage, but if you look at the math and the history of the markets, the evidence supports this approximate withdrawal percentage. This 4.5% rate, supported by market history, gives you a sustainable lifetime annual withdrawal rate for a diversified portfolio with the majority of your money in equities and real estate (though your financial advisor or CPA can help determine what’s right for your specific situation.)

Here’s how this looks in practice:

A $10,000 nest egg offers $450 of annual withdrawals
$100,000 → $4,500
$500,000 → $22,500
$1 million → $45,000
$10 million → $450,000

With this new percentage, consider this reframe when talking about your money: "I have $4,500 or $45,000 of potential annual income" (instead of saying that you have $100,000 or $1 million in assets.)

The Psychology Behind the Numbers

Psychologically we like the idea of thinking about total numbers; $50,000 or $1 million total in our 401k plan, for example, is the number that often imprints onto our consciousness. But our brains are wired to fear loss. A $50,000 portfolio drop feels catastrophic, especially if it pushes your portfolio below a nice sounding number. But $2,250 less annual income (4.5% of the $50,000 drop) feels more manageable, right? Same math. A completely different feeling.

By focusing on what's most practical and meaningful, you're more motivated to either accept that withdrawal amount as enough, increase that number, or adjust your spending during retirement. You're also less likely to be so rattled by market gyrations - a key determinant of mental health and financial success.

For one week, ponder how this number impacts how you spend and save, as well as how you feel about your money.