Posts Tagged ‘Retirement’

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.

Four Priceless Pieces of Advice from Mr. Money Mustache

Thursday, December 24th, 2015

mr money - not wide

If you’re unfamiliar with Mr. Money Mustache, he’s the man taking the internet by storm as a financial guru who successfully retired in 2005 at age 30. His name is Pete, and he describes himself as “a thirtysomething retiree who now writes about how we can all live a frugal yet Badass life of leisure.”
Several people I personally know have now subscribed to MMM’s (Mr. Money Mustache’s) way of living (or are at least trying to), and say that his philosophies and teachings have changed their financial views forever. How can it not? After reading several articles on his website, you might start to question your own financial decisions and direction that your life is going in. However, there’s never any reason to feel despair, his teachings are for people of all ages and payscales. Here are four priceless pieces of advice that I’ve found to be most advantageous.

Ridiculousness is Ubiquitous

This post, I imagine, was written to address critics of the MMM lifestyle. It goes over hypotheticals of two extreme views of wearers of red, and wearers of blue as a metaphor for those who live in extreme extravagance, and those who live in frugality, and how ridiculous they look to each other: “In one area, the Sheeple wear red costumes and fiercely criticize those who wear blue. But just on the next continent, blue-wearers are in the majority and they are beheading those who dare to wear red. Great books and ornate traditions are built to describe how wearing Red robes is The Way, which are cited authoritatively to discredit those who believe in Blue, and vice versa.”
This article was one that I didn’t think would apply to me, as I most definitely do not consider myself to be one that lives in extravagance, or frugal. What it did for me, however, is open my eyes to see that there are definitely attributes of the extravagant that I found myself subscribing to, and that we all subscribe to, even if we cannot afford the Ridiculousness, or it just didn’t make sense for us. The frivolity of it all that dawned on me is was struck me the most.

Renting vs. Buying

The subheading for this article is “If you have to ask, you should probably rent” and that sentence has been bouncing around my head since I read it a few weeks ago. Partly because I myself have been toying with the idea of getting out of the rent race, and settle down in a nice 2 bedroom townhome, hopefully within the next year. So I read this article thinking that it would sway me the direction that I wanted to go, but again, I realized I was being Ridiculous again. With a capital R.
Pete, who is Canadian, goes over the numbers in this article, and breaks down just how much home-ownership in the busy city of Toronto actually will cost you.
In the end, Pete says, “If you live in an area where houses cost more than $300,000, take a close look at the rent prices around the areas you currently drive. Budget your driving costs at at least a dollar per mile (80 cents/km in Canada to account for higher costs) because you absolutely must put a high value on your spare time to get ahead in life. Doing the math on life decisions like this was by far the biggest factor in my own early financial independence.”

Teach Your Children Well

In this article, Pete says, “As parents we are really in the business of producing the happiest and most capable adults we can, given the constraints of the real world. If my boy eventually ends up as happy with his lot in life as his parents are, we will be more than satisfied.” Which I think we can all agree that that’s the goal of all parents, but what most don’t know is how to help their children reach that point, and become successful adults. A huge part of it, as Pete says, is teaching your children about money the way that you wish you were taught.
Living by example, talking about higher education, making money, and where money goes are all lessons that he goes over in this article. Read it, and pass it on.

There are Investments with Instant Gratification

This article surprised me, because I really was expecting advice on investing. I should have known better, but hey, I’m kind of new to this. What’s talked about instead is mainly family, frugality, fanciness, and living a great life. Pete writes, “How can fanciness and frugality both exist at the same time?

It’s really simple, and best summed up with just a few more key F-words:

Focus, Festivity and Flow

It’s important to remember that life is about being happy and doing what you love, and taking it day-to-day. “Nowadays, I make a point of putting some good stuff on the stereo at appropriate times (the festive times) throughout the day. It’s easy to forget, but it is definitely worth remembering.”

Be happy, be frugal, be wise, and be kind.

Make Room in Your Budget for Retirement Savings {infographic}

Monday, December 14th, 2015

Retirement savings - norm

Living on a budget can be tough, especially if you’ve had to make cuts to your spending in the past to make sure you’re living within your means. But even if you’re living well within your means, and you’re still not saving for retirement, all that budgeting can be for naught.
The fact is that a majority of Americans don’t have a regular savings account, and an even bigger majority don’t have a retirement savings account.

Here are the stats:

Click to enlarge:

Retirement stats

New Year’s Resolutions: Apps That Will Help Get Your Finances in Order in 2016

Monday, November 30th, 2015

resolutions

Behind losing weight and being healthier, getting out of debt and saving money might be one of the biggest New Year’s resolutions that Americans set for themselves. It’s also one of the most broken New Year’s resolutions, because like all resolutions, it’s easier said than done. If you’re serious about getting serious, and want to start being financially healthy, saving money, whether it’s for retirement, or you’re trying to save up for a new car, then you’re going to need some good tools in your tool box.

Robinhood

robinhood

Robinhood started with the idea that a technology-driven brokerage could operate with significantly less overhead. They cut out the fat that makes other brokerages costly — hundreds of storefront locations and manual account management. Regularly, to make a trade, it can be up to $10 per trade, but with Robinhood, there’s no trade fee, runs commission-free, and will allow users to transfer money from their bank account to trade stocks and ETFs. Real-time market data, and notifies you in advance of scheduled events — like earnings, dividends, or splits, so you can get up-to-date information at the right time.
Robinhood is available for iOS as well as Android.

Acorns

acorns

In their own words, Acorns is an automated process driven by a team of engineers, mathematicians, and a Nobel Prize-winning economist constructs and monitors your investment program, so you don’t have to. Acorns invests in low cost ETFs and passes these savings on to the users in the form of low management fees. Using Acorns for a year can cost less than some traditional brokers charge for two trades.
The app lets users round up purchases to the nearest dollar and invest that spare change, but users can also contribute lump sums if they want. In terms of investments, there are 5 basic diversified portfolios of index-based ETFs, based on risk levels, from conservative to aggressive. In terms of fees, Acorns charges $1 per month, while the investment portfolios charge between 0.25% and 0.5% of assets, annually.
Acorns is also available for iOS as well as Android.

Digit.co

digit

Digit.co is a little different from the other two on this list not only because it’s not an app (it operates through your phone and online), but also because its purpose isn’t investing, but saving money. Signing up for Digit takes a couple minutes, it syncs up with your bank, and gathers data on the spending habits of its users. I use Digit personally, and I can’t say how I feel about it, mainly because I don’t notice it working, and that’s the entire point. Digit transfers a small amount of money every few days into your Digit savings account, it’s designed to learn your spending habits so that you won’t accidentally overdraw your account, and as I said, it’s very sneaky. Small amounts of money here and there add up very quickly, and when you want to transfer money from your Digit savings account to your checking account, it’s quick and easy.
Digit is available on every device as it’s not an app.

Does Anything Change for Your Retirement After Marriage?

Thursday, November 12th, 2015

retirement marriage

It’s no secret that married couples in the US are eligible for a variety of nuptial benefits, like tax breaks, deductions, estate planning, and so on. But what most people don’t know if that there are retirement benefits as well, and some that single retirement savers are not eligible for. What those benefits are differ depending on what type of retirement plan you invest in, so let’s break them down.

401ks

If both people in a marriage are working and earning income both have a 401k can defer income tax twice as much cash as single people. Couples who are only able to save a limited amount can decide which 401k has the better employer contributions, and focus their savings efforts there, but the ideal situation would be getting matches from both employers. It’s silly to turn down free money. Between 1992 and 2010, married women’s contributions to retirement accounts increased from 20 percent to 38 percent, on average, according to a Government Accountability Office analysis of Federal Reserve data. And among dual-earner households ages 55 to 64 with 401ks or similar types of accounts, women contributed an average of 44 percent of the household’s deposits in retirement accounts.

Individual Retirement Accounts

According to IRS rules regarding IRAs, married couples have different income limits than individuals when it comes to their ability to make tax-deductible IRA contributions if they also have retirement accounts at work, such as a 401K. For example, the tax deduction for traditional IRA contributions is phased out for married couples with a modified adjusted gross income between $96,000 and $116,000, compared to between $60,000 and $70,000 for individuals. An individual who doesn’t have a workplace retirement account, but is married to someone who does have one can claim the tax deduction until the couple’s income is between $181,000 and $191,000. The adjusted gross income phase out range for Roth IRAs is $181,000 to $191,000 for married couples and $114,000 to $129,000 for unmarried individuals.

Social Security

Married individuals have Social Security claiming options that single people don’t, and they can use various strategies to maximize their benefit as a married couple. Spouses are eligible to receive Social Security payments worth as much as 50 percent of the retired worker’s benefit (if it’s more than they would get based on their own work record), and surviving spouses are entitled to up to 100 percent of the higher earner’s benefit. Married individuals can also claim spousal payments and benefits based on their own work record at different times in their lives. For example, a wife claiming Social Security payments based on her own work record might switch to survivor’s payments based on her husband’s work record when he passes away if his payment is higher than the one she is getting. Couples have an advantage in that they can play the game a little bit and try some strategies, a widow’s benefit is going to be based on whatever his final benefit is, so by waiting until age 70, if something does happen to him, she will get that higher benefit. Divorced spouses can get these payments too if the marriage lasted at least 10 years. In contrast, single people or divorced individuals whose marriage did not last a decade can only claim benefits based on their own work record.

Traditional Pension

Traditional pensions generally provide a steady stream of payments over the lifetime of the retiree and are also required to provide payments to a surviving spouse. However, more than a third of married households with pensions opted not to receive a spousal survivor benefit, often to get higher monthly payments, the Government Accountability Office found. But a worker who wishes to opt out of the spousal coverage needs written consent from the spouse. Some pension plans also give workers the option to take lump-sum cash payments instead of lifetime payments, which allows them greater freedom to spend or invest the money, but also results in the loss of the security of guaranteed monthly payments in old age.

Author: Tanya