What are you working for?

Saving for retirement is hard. The entire concept is fraught with uncertainty, and there is an entire industry dedicated to alleviating the pain of you having to do your own math. This can lead to devastating results. If you do not take charge of your future, who will?

The first, basic question is how much do I need for retirement?

Grant Cardone says $1 million is not enough and “I would suggest you make it $10 million.”

Investopedia says, “Most experts say your retirement income should be about 80% of your final pre-retirement salary.”

Should we blindly follow a rule of thumb or calculate it ourselves?

The basis of planning for about 80% of your income after retirement assumes that you plan on living the same lifestyle you did before retirement as when you are retired. On the surface, this makes sense…

But in reality, it makes little sense to expect the same expenses when you retire.

Maybe you currently work many hours, run a business, and put a lot of your money into things that trade time for money. Your lifestyle could include many expenses designed to allow you to focus your energy on your career and money-making potential.

On the other side of things, you might hope to have a lot more disposable income in retirement because you will have a lot more time on your hands to spend money. It is fairly easy to inadvertently be frugal when spending so much of your day at work and keeping sharp for work. But when you have more time for leisure it is easy to imagine you will want to spend more money—travel, shopping, etc.

If you plan to trade an income-producing activity to fill your time with a hobby, chances are you will need to fund it. Perhaps you are planning on dedicating your time to a cause, charity, or community organization. As you get involved, you will likely want to donate more than just your time; you will want to leverage the ability to fund it as well. So make sure to include that in your plan!

But How Much Will I need?

Keeping to a fairly “standard” lifestyle design of planning to live off of 80% of your income. Say you currently have a desired household income of 150k a year and are currently 30. You plan on working another 20 years and increase your income at a rate 2% faster than the average inflation of 3.22%.

That would put your projected salary at $425,000 a year upon retiring. This is also $225,000 in today’s dollars due to the assumption of income increasing at a rate 2% faster than inflation. Since knowledge and skills can benefit from the wonders of compound interest, growing income over time faster than inflation should be the goal.

Using Bankrate’s Retirement Calculator is basically an annuity calculator drawing down to a future value of 0. I put the assumptions above the same inflation rate, a 50 year retirement period, and an annual return of 7%. 7% seems like a safe but aggressive number for a well-thought-out portfolio of investments. It would also be cool to live to 100. The result was eerily close to Grant Cardone’s projection of needing $10 million to retire.

The one caveat I can place on this is that while I would plan to keep up the same lifestyle spending on the early years of retirement, I would anticipate at 90, outside of healthcare, that I would not be spending that much money.

Bankrate.com retirement calculator showing I need 10 Million to retire full stop.

Because of inflation, the amount required per year to keep the same level of retirement over a 50-year span is quite high. After all, you would not want your retirement savings to run out before you are done with it!

That is a Lot of Money. Is There Another Option?

There are two ways to achieve richness. The first is to increase income to exceed expenses, and the second is to reduce expenses. To increase income, we must consider what it means to retire.

To reduce expenses, we can consider that you may pay off your housing by then. You will likely be an empty nester and can downsize your housing cost by being an empty nester that will equate to lower household spending. You will no longer be saving for college tuition, potentially for helping with weddings or other things.

Do not sell your hopes and dreams short because the number seems large today. Maybe you will plan on continuing to invest heavily in your kids or grandchildren through retirement. Maybe you plan on increasing or keeping your housing cost the same by buying a second home for leisure or using your home for ministry.

A Full Stop Retirement at 50?

If you are planning retirement at 50 and then living to 100 without changing consumption, that is a LOT of runways to clear. By achieving it, you might hit what you consider “financially free,” but there is a whole spectrum of financial security that you can obtain without banking $10 Million.

One way to change the required numbers is to change the notion of what retirement is. Perhaps it is a change of careers from something primarily economically driven to something more socially driven. Perhaps it is retiring to actively manage investments so that the expected return is far greater than 7% for several years.

Coast FIRE is a movement that addresses the idea of not fully retiring but saving up for your retirement and then potentially switching careers to something more sustainable or fulfilling. Then delaying withdrawal from the retirement fund until it has had more time to compound.

Either of these directions will dramatically lower the amount required to retire because they are both effective ways to increase your income during the first years of retirement.

How much is required if we earn in retirement and/or spend less?

Now, say you calculate that you would be happy with 60,000 in today’s dollars per year in retirement. You ditch the notion that you will also grow in the trappings required as you grow in your career. Instead, you will be content with less of an opulent retirement and satisfied in achieving financial freedom earlier.

Using Bankrate’s calculator again, we can determine that we will need $2.6 Million in a nest egg to retire with $60,000 a year in income. This is starting to sound more achievable.

Using Bankrate’s calculator for savings, a $3,000 monthly savings at a 12% yield will earn enough to fund the $60,000 retirement in 20 years. A 12% yield is pretty solid but not unattainable. This should definitely be possible with a 6 figure salary, and even within reach with a high 5 figure salary.

An index fund will not likely get you there. While stocks have good performance over the long run, a 20-year stretch is hardly the long run on the stock market. For instance, the last 20 years have averaged a 6% return. From 1985-2004, the average was 11.64%. So while the returns may be good over the long run, they are too unpredictable to use on such a short run to get to retirement in 20 years.

But where can you get 12% returns on your investment consistently? I believe that rental property can help you achieve this. Don’t just take my word on it, though. You should do the numbers yourself, evaluate potential investments, and talk to other investors who have done similar things. Of course, Brandon Turner from Biggerpockets.com has already done some math about achieving a 12% annual return in real estate.

Now what?

“A goal without a plan is just a wish”

To retire early, you need to execute a solid plan. Don’t just take my math and call it a day. Instead, use your own assumptions and goals to calculate how much you need and build a plan to achieve that.

You will need to learn how to manage your money to achieve the yield in your projections. If you choose to put a significant portion into real estate or some other closely held business, you will need to learn the ins and outs of that business. Another option for achieving consistent yield is learning how to live off dividends.

The critical step of this is to start setting money aside and investing it according to your plan. For example, the plan for retiring on $60,000 in 20 years required $3,000 a month. Suppose you can save that in a flat line. That is great. The more you can save earlier grows at a better rate. However, the practical reality is that you probably will not be saving at a flat line.

If you are maintaining your lifestyle for 20 years while increasing your income in your career, it will be easier to save a higher percentage of income as you go. The key is to pick an achievable model, work the math on savings, and see if it will get you to your goals. Then, to track how you are doing, you can set your net worth targets by age and work to keep on track with them.

Write Your Plan Down

Once you have mapped out a retirement plan, it is time to record it. Since we are talking about a 20-year plan here, it would be easy to do the math and forget about it. So write your plan down, and hold yourself accountable for it.

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