First of all, if today’s post sounds a little wonky, it’s because I am flying solo this week. My wife (aka super-mom) is at boy-scout camp (volunteering) with our son. In addition to being a great wife and mom, she is also my editor, so let me apologize in advance if this entry is less than stellar (or as my son might say “epic fail”). Anyhow, the show must go on.
Today, I want you to start with the end-goal in mind and work backwards (I know that sounds crazy, but stick with me). Conventional wisdom says you need to accumulate 25X your annual retirement expenses to achieve financial independence (the freedom to stop working, if you so choose). I will do a separate post on how to calculate your annual retirement expenses, but for starters you could use 70% of your salary as an estimate.
Let’s stick with that 25X goal (at least for now) and then decide when you want to achieve your personal financial independence day. Let’s start with 20 years as an example. My estimate of my annual retirement expenses is $80,000. 25X $80,000 is $2 million. This strategy assumes you could then stop working and withdraw 4% of the $2 million to “produce” a salary of $80,000 going forward (the so called “safe withdrawal rate).
So if you want to accumulate $2 million, in 20 years, how much do you need to save to get there? Let’s assume that you earn an annual rate of return of 10%. Let’s also assume you have already banked $250,000. If you save $12,000 per year or $1,000 per month (about $33 per day) then you will have more than $2.4M in 20 years! (that’s the power of compounding!). I hope you get the point of working backwards to see how much you should be saving per month – or even per day – $33 per day sounds a lot more reasonable than trying find an extra $12,000 per year. . . See below a link to 401k retirement calculator whereby you can choose the assumptions for your dream.
Net worth (total assets less total liabilities) is really the best measure of how you are doing financially; because it’s not how much money you make, it’s how much money you keep! I encourage everyone to calculate your net worth, at least once a year, write it down and see if you are achieving progress toward your goal of financial freedom. Some benchmarks (rule of thumb estimates), to see if you are on track (to retire at 65):
1X salary at age 35
2X salary at age 40
4X salary at age 50
5X salary at age 55
8X salary at age 65
If you need some help getting to your monthly savings goal, start by examining the big 3 expenses in your budget: housing, transportation, and food. I realize most of you have other expenses, but these 3 are usually between 60 and 70% of your expenses and are probably the most likely to be impacted (changed) by your personal choices:
- You could downsize and reduce your housing expense
- You could buy a less expensive used car (preferable with cash) and reduce your transportation expense
- You could bring your lunch to work and reduce going out to eat to reduce your food expense.
See “my expenses are too high” (link below) for other ideas to reduce your monthly expenses
Also see my post (link below) about getting a raise because frugality will only take you so far; sometimes you need more income.
You might also consider a side gig/hustle – I know it’s not exciting, but you could deliver pizzas on weekends to help earn some extra money. Getting ahead isn’t easy; but as Dave Ramsey says, live like no one else now, so later, you can live (and give) like no one else!
I also strongly recommend you read “retire inspired” by Chris Hogan. This book is a little different, it also includes a free analysis of your R:IQ – his term for the financial number you will need to retire or be financially independent. “retire inspired, it’s not an age, it’s a financial number”.
Maybe we should stop using the word retire, or at least redefine it. Retirement shouldn’t be defined by your age. If you work hard, you could be financially independent in 20 years, and choose to keep working. That’s freedom. Keep working, at a job you love, because you want to, not because you have to!