And there you have it… THE question most are asking when they start reading this site. “How much money do I need to retire?” Actually and unfortunately, it’s not the real question they (you) are likely asking.
The real question people ask is more clear with the change of one word. Here’s your real question: “How much money do I WANT to retire?” Stay with me here. There is a vast difference between want and need. Maybe I sound like your father with that statement. But if you’re here sincerely trying to figure this whole thing out, you know that at least for some things your father was right.
The Simple Math For Retiring
For example if you’re spending $50,000 a year and WANT to keep spending like that indefinitely, You will need about $1,250,000 saved to retire. If you could subsidize that with Social Security or a pension, subtract your yearly income amount from $50,000 and multiply the difference by 25.
$50,000 – $15,000 (a year of SS benefits) = $35,000
$35,000 x 25 = $875,000 in savings to retire
The above example assumes you will wait until your SS benefit is available, typically somewhere around 62-70 years of age. Now that’s not retiring sooner, but it works. However, you could modify the amounts to compensate until your benefit or pension kicks in. That math is a bit more complicated, but the principles are the same. You will need savings of roughly twenty-five times your expenses.
Maybe you WANT to actually spend more than you’re currently spending. Well, do the math. Maybe you’re spending more than the example and plan to spend less because you will close a few loans and some of your needs won’t be quite as high. Perhaps your children will be living on their own or you will pay off your home.
The math still works the same– twenty-five times what you will spend. If you’d like to figure out how long it will take you to save that much money, read the post I wrote about savings rate here.
In these instances, it’s really about what you want.
There’s A Problem With What You Want
Yet, this want thing is the fundamental problem. Most of us have built a life around the most expensive home we could afford, the most expensive furniture we could afford, the most expensive electronics we could afford, the most expensive cars we could afford, the most expensive restaurants we could afford, the most expensive clothes we could afford, the most expensive toys we could afford, the most expensive trips we could afford, the most expensive cable package we could afford, the most expensive grocery bill we could afford… It simply goes on and on. In fact, we get the most expensive thing we can afford and yet we aren’t any happier in the long run.
It’s fascinating that a three bedroom apartment in the U.S. is typically around 1,300 square feet, but we think a three bedroom house needs to be over 2,000. The same thing goes for cars, and clothes, and food, etc.
It’s A Vicious Cycle, But There Is Hope
I’ve fallen prey to this cycle. How much money do I have? What’s the “best” thing I can afford with it in this particular category. Even though I thought I was a savvy shopper, I had been hoodwinked by the cycle anyway. I was still trying to get the most I could “afford” based on how much money I had to spend.
I did it with cars. I was in the market for a car and would determine how much I could afford to spend… all the way up to the last cent. After I figured it out I’d shop for the “best” car I could find for that much money and spend it all. I’d leave little margin, and the only way to save more would be to get a raise, or a promotion, or look for a higher paying job, or maybe eventually pay something off, or find a side hustle, or… However, if any of that actually happened I’d figure out what else I could spend that money on.
Getting the most for your money is a good thing. In fact, that’s still a big goal. The difference is that broad chasm between want and need. If you are a savvy shopper, you are getting the most for your money based on the things you want. But what if you wanted what you already have, and you only spent your money on the things you truly need? And what if you got the most for your money on those needed things?
What if you had just as dependable a car, but for 25% of the costs? Can you even imagine what it would be like to own the car you drive and only maintain it? What if you didn’t even need a car? Gasp! What if you could use public transportation or even bike or walk to work?
Could you imagine living in a safe neighborhood that’s still nice, but only spending half what you do on your current home? What if you had enough room for everyone but the heating and cooling bills were less, the insurance was less, the mortgage was less (or even non-existent), the taxes were less, etc?
How about food costs? What if you could eat really savory and healthy food, everyone was well-satisfied and full, but it cost 25-50% less?
You see if it were really about need, the total amount needed to retire would be much less. It’s still twenty-five times expenses, but $25,000 x 25 = $625,000. That total is almost 50% less. How’s that for savvy shopping? You just discounted the next 20+ years of your life and added several less working years to boot!
In more extreme cases (considering how you’d define extreme, and I assume you’d define this as extreme), people have lived well on $7,000 a year (Note there are some expletives). He only needs $175,000 to retire. $350,000 for him and his wife. Some of you could come up with that in just a few years if you set your mind to it.
Please, Don’t Leave Yet!
I can hear many readers giving up and just trudging back to your grind-it-out life while saying these thoughts of mine are ridiculous. Before you go, I want you to know that people who commit to this kind of lifestyle still travel. They even travel abroad. They eat well, really well. Also, they have nice, comfortable homes. Also, they still have nice vehicles and clothes. They have rich, robust lives filled with adventure and time for the people they love. I have yet to find one that regrets figuring out the want vs. need thing. You can have almost anything. You just can’t have everything. Sure, some choose to do things differently. In fact, once you arrive you might be shocked at how differently you choose to do some things. However, you don’t have to be so “extreme”.
How Much Money Do I Need To Retire Sooner?
Take a look at your expenses and the things that make them total what they do. Work on making them more efficient towards what you need, not the most you can afford. Once you do you can more accurately figure out how much money you need to retire. If you work at it, you will even be able to figure out that burning question… “How much money I need to retire sooner.”