I’ve been working on a small book here and there and with the Amazon business taking off and starting my bachelor’s degree starting up, I wanted to publish some of my writing until I can fully write this book and complete it. In the meantime, I’ll be publishing a few chapters, although small, as blog posts for feedback.
How Much Do You Really Need To Retire?
Have you really ever thought about quantifying the exact number you would need to retire and live the lifestyle you want? Most people just save as much as possible without any thought on how much is enough. In Tony Robbin’s latest book Money: Master The Game he explains how some people save more money than they actually need to. Instead, that extra money could have gone towards increasing that person’s lifestyle without their wealth taking a hit at all.
In following chapters, we’re going to use the Dreamline Technique to quantify what your ideal lifestyle is and how much it would really cost, but for now, we’re going to focus solely on figuring out how much you need to retire with the exact lifestyle you want.
How great would it be to retire and never make a financial or lifestyle sacrifice? You would have the house you wanted, the car and the lifestyle. We’re going to write down all of your current costs and potential future retirement costs to create a better picture of your expenses to better determine how much we’ll need in retirement.
I want you to write out the following expenses (Financial Freedom):
- Rent or Mortgage payment: $________ per month
- Food and Groceries: $________ per month
- Gas, electric, water, phone: $________ per month
- Car payment, transportation: $________ per month
- Insurance payments: $________ per month
Total: $________ per month
Total monthly expenses: ____________ x 12 = _____________ per year (Financial Freedom)
Knowing your basic annual expenses is the foundation of understanding how much money you’ll need in retirement to retire at your current lifestyle. At this point we haven’t added anything, just maintaining our current lifestyle. Now, multiply your annual expenses by 25 and you’re given the total amount you’ll need in a retirement account to retire and live off the interest and maintain your current lifestyle. Was it was big as you thought it would be? Was it more than you thought it was? This method assumes a 5% return on your money. The stock market has averaged a return of 7% over the last 200 years, but I’m assuming you’ll eventually want your retirement money in something a bit less volatile.
Now let’s have some fun. Let’s start crafting the lifestyle you’d want in retirement. I know for myself, I only ever care to increase my lifestyle, never to simply maintain it. So let’s start adding a few items on to our expenses and re-run the math.
- Total monthly expenses (Financial Freedom): $ ____________ per month
- Luxury Item #1: $ ____________ per month
- Luxury Item #2: $ ____________ per month
Total monthly expenses: ______________ x 12 = _____________ per year (Ideal Retirement Lifestyle)
Again, multiply your Ideal Retirement Lifestyle annual cost by 25 and you have your new retirement total needed to cover your ideal lifestyle.
Now, the items you add can be whatever you want. I wasn’t even sure what I would want in retirement, but I knew I want enough income to do essentially whatever I wanted to do. For me, $116,000 a year in income seems pretty great to me, so my total retirement number is roughly $2.3 million. Quite a lot of money, but I know I can easily retire on less and still enjoy my life. Even if I only hit half of that number, I’m still doing quite well for myself in retirement.
Now you should know exactly how much money you’ll need to retire living the lifestyle that you decide to live. In the following chapters, we’ll put this information to use within our automated system of building wealth.
Ensuring your building wealth every single month
At this point, you should have the exact percentage of your income that should be going to each account (or bucket) and can quickly get the exact amount that needs to be transferred to each account to reach your goals
. The problem now is that I’m much too lazy to make these transfers every time I’m paid. Instead, I make my accounts work together to automate the whole process. Here’s what it looks like:
Money comes into my Main checking account (My Inbox). Then, a few days later, Capital One (my savings accounts) pull a specific amount of money to each of my sub-accounts created for each of my short-term savings goals
. Next, It’s time to invest. I don’t actually invest my money as that would take effort. Instead, I have Vanguard (my Roth IRA and Target Date Fund) pulls the amount I have allocated to investing in my account and invests it into a specific fund for me. Lastly, because I use credit cards to pay for everything possible, I pay off my credit card. This included all of my fixed costs.
This is all done after a fifteen-minute setup and without me ever lifting a finger again. With 3 days my accounts will have paid all of my bills, saved for all of my goals
, invested my money in a great fund and paid off my free spending, which I also put on my credit card. The only thing I needed to do is check my credit card amount to make sure I’m not overspending.
Setting Up Your Accounts
The first and main account you’ll need is a checking account that will act as your income inbox. All money starts here. I personally use Schwab Investor Checking as they refund any ATM fees up to $200 per month and are great to work with. Whenever you get paid, your money should go here first.
Next are your savings accounts. For this, I personally use Capital One 360 Savings. They allow you to create “sub” accounts without actually needing to create new accounts. I have accounts for all of my savings goals
– Vacation, home down payment, etc…
Lastly, you’ll need an investment account. If your employer offers any sort of match for their 401(k), you’ll want to focus there first as it’s literally free money. I work for myself currently so I focus on a Roth IRA which is after tax money. So when I retire and take money out I won’t have to pay any taxes on it. I use Vanguard for their incredibly low fees and put most of my money into a Target Date Retirement Fund. This fund is amazing because its fees are so low, you can start with $1,000 and it will auto-reallocate for you. All that means is that as you become older, your money will be places in less volatile investments, preserving what you’ve built.
Making Your Accounts Work Together
Here’s where the fun comes. we’re going to make everything work the way it should without us having to do the work ever again. The great thing about modern banks is that they have begun to work very well together and making transfers automated. So let’s setup our system.
Our income should be direct deposited into our Main Inbox (checking account). This should already be setup and no further work needed. We will need to give access to our savings and investing accounts access though. In order to do that, log into you both accounts and find the transfer tabs/links. You’ll then add your checking account and create an auto-transfer either bi-weekly or monthly depending on how you get paid to transfer the specific amounts you have decided on for saving and investing.
Let’s say you get paid on the 2nd of the month. You’ll want your savings and investment accounts to make a transfer a few days later, preferably the 5th. This gives you a time buffer in case something happens with your payment. Then, on the 7th you’ll want your to pay off your credit card and bills that are automatically paid with your credit card. By the 7th you should only have what’s left over from saving and investing in your checking account. This way you know exactly how much you have to cover your expenses and what’s left over for free spending. You can easily have your credit card auto-payed.You can potentially run into an issue if you’ve spent too much though. The best way to combat that possibility is to maintain a buffer of 150% of your expenses in your checking account at all times. Think of it as a small emergency fund in case things go wrong.
That’s all the work required to automate your finances and to begin building real wealth over time. At this point, you should know how much you need in retirement, have tweaked your spending habits, created the accounts necessary and automated the whole thing. Congratulations, you’ve done 90% more than the average American!
I would really love your feedback on these two chapters. What did you like, what did you not like? These are first drafts and I intend them to be MUCH longer once finished. Please leave a comment below and let me know what you think.