Posts Tagged ‘finances’

The Simple Math: How Much Does Someone Really Need to Retire?

Monday, December 28th, 2015

Simple math

Ok, honestly? Saving for retirement is sometimes tough to get excited about. It’s so very far away, and it feels like a slow uphill climb. And it seems that no one can ever seem to tell you how much you actually need to save.

But the fact is, we NEED to plan for it, we know it’s imperative that we get it right.

How much do I need to save for retirement?

This is an age old question that has long been debated, and will be debated until the end of time. Luckily, there is a great study that was done for us to put some simple math behind the answer to this question. The Trinity Study was a paper written by 3 professors of Trinity University in 1998 (and was updated in 2009), and the conclusion showed that retirees could live on 4% of their total retirement portfolio annually for up to 30 years without running out of money. They reviewed payout periods from 15-30 years against stock market data from 1925 – 1995, accounting for cost of living increases as well. The Trinity Study deemed 4% the “safe withdrawal rate” for a 30-year retirement.
To break that down, here’s how it would look:

  • You have $750,000 saved for retirement
  • 4% of $750,000 is $30,000
  • You can withdraw $30,000 per year for 30 years “safely” in retirement

If you want to adjust the variables, there’s a great calculator out there called FIRECalc that can show you the details of how long your portfolio can last using the Trinity Study data. This also does NOT take into account other forms of income such as Social Security or the increasingly rare pension. Bottom line, you need to figure out what your retirement budget looks like (e.g. Living on $40,000 per year), and then multiply that by 25 (25x 4% = 100%) to get to your retirement number (e.g. $1,000,000).

How to stay motivated

When I’m faced with a long-term goal, the easiest way for me to stay motivated is to break it down into bite-sized chunks. When I want to buy a car, I price it out (say, $5,000), and then figure out WHEN I want to buy it. If I want the car in 1 year, I divide the cost by 12 months and figure out how much I need to save per month to get there ($416 per month).

For retirement, we can run the same math equation. If you can only live on 4% of your total portfolio per year, then you need to save 25x your annual spending. But I like to break it down even further.

You need to save 300x your monthly spending to retire.

Now, that may seem like a daunting number, but the real magic here is you can easily impact the number by reducing what is required in your monthly budget. Here is the rule to live by when looking at any recurring expenses in your monthly budget:

For every dollar I spend, I need to save $300 for retirement.

I hope that sentence gives you some pause as you think about the mindless things you can waste your money on each month. Heck, your $9 per month Netflix account requires another $2,700 saved to keep in retirement.

But on the flipside, for every dollar you CUT from your monthly spending, that’s $300 LESS you need to save!

How to get to retirement faster

So now that you know how your monthly budget will affect your retirement goals, you can strategically reduce your expenses. Let’s look at how a few quick savings tips can impact the amount you need to save for retirement:

  1. Cancel Cable. This one is a no-brainer these days. With Netflix, Hulu, Amazon Prime, Crackle and Sling.tv, there’s no reason to hang on to that expensive $80-per-month cable bill. I recommend picking two paid services, and watch the rest free. At most, you’re still saving $50 per month.

    $50 x 300 = $15,000 less needed for retirement

  2. Reduce Phone Bill. There are many services out there that are MUCH cheaper than the big cell companies. Services like Republic Wireless and Ting allow you to get all the talk and text you want, with reasonable data rates, possibly cutting your bill in HALF! If you take two phones on a major carrier and move them over, you can save $80 per month with the same plan!

    $80 x 300 = $24,000 less needed for retirement

  3. Lower Monthly Food Bill. Simple meal planning can drastically reduce the amount spent on food per month. Sit down at the beginning of the week and come up with dinner plans ahead of time. Planning around what’s on sale and what you have in stock can keep you from buying things you don’t need. If that’s too much work, services like eMeals will do it for you for a mere $5 per month. Savings is AT LEAST $100 per month, and usually more.

    $100 x 300 = $30,000.00 less needed for retirement

As you can see, the three simple changes above resulted in almost $60,000 less needed to save for retirement! For most average Americans, that would allow them to retire over 1 year earlier! Imagine what you could do if you really started to dig into your spending and see where money is leaking out. I bet you could easily shave over $100,000 off the amount needed to save for retirement, OR MORE!

So the next time you add an item to your budget, or think about signing up for a service that you probably DON’T need, remember this rule:

For every dollar I spend, I need to save $300 for retirement.