There’s one magic question that never follows up with a magic answer.
“How much money do I need to retire?”
Well, it’s hard to say. There’s not a simple answer. However, in this brief overview, I’m going to do my best to explain it in full, so that you can move forward with a financial strategy in place to earn the maximum amount for your retirement.
We’re going to go over common expenses, what the current average is as of writing this article, and how to manage that while saving money for the long haul.
Everything That Factors Into Your Retirement
In order to find out just what people are spending money on, a lot of time and effort has gone into researching each topic and finding studies, articles, and in-depth information related to this topic.
However, we are using averages here, so your own expenses may differ from what is shown. Only you know your own finances, so take that into account.
These are the most common expenses that you’ll run into on your way to retirement. Still, you need to have a:
1. Family Expenses
Most of us end up starting a family. While that’s not as common for millennials and generation z, the population in the United States isn’t exactly going down, you know?
Families cost a ton of money. According to Investopedia, it can cost you $233,610 per child from the time of their infancy until they’re 18.
That’s insane. Even if you’re bringing home $40,000 per year, that means that over 32% of your income over that time (not including your income tax) is going to one child.
As I said, families cost a ton of money, especially because many households do not just have one child.
The average, as of 2018, is 1.9 children per household.
Family expenses can also range from helping your brother-in-law with a repayment so he can avoid falling into foreclosure, helping your wife with her new business and shelling out $1,000, or any combination of them.
It’s hard to say no to family, but keep your personal finances in order while helping them. Weigh if you can actually aid them or if your personal finances can’t sustain it this month. Be transparent with people.
Saving for college for your children is also another big one.
You’re going to have to consider college funds and other ways of saving money and letting it build an interest rate to minimize the total amount you’ll end up spending on it.
2. Your Lifestyle
This would fall under expenses more than anything else.
Most of us enjoy our lives, even when some things get in the way of that. Most people are happy, but the old saying “Money can’t buy happiness” is utter garbage.
It’s been proven through hard-hitting research that money does buy happiness—at least up to some point.
It buys you peace of mind, it buys you psychological wellness, it buys you things you need, like financial security. You should have up to six months of expenses tucked away in case of disaster, and with that, you don’t fear a little bit of lost money from time to time.
It’s been shown that a staggering 40% of Americans don’t have the money to cover a $1,000 emergency if it were to occur in their lives.
That would stress me out to no end. There’s uncertainty around every single corner. Your lifestyle could be costing you money, or it could be saving you money for retirement.
You don’t have to stop doing all of the things you love, either. Some of us have certain things that we just absolutely love doing or having, or enjoying on a weekly or monthly basis.
That’s okay; we’re humans, and nobody is expecting you to live life like a prisoner.
That being said, you could probably cut down on your expenses based on your lifestyle.
You could get smart LED light bulbs to help you when you leave the light on at night. You could make coffee at home for 10% the cost of what you spend at the coffee shop each morning before work.
Assess your lifestyle, and don’t be easy on yourself. Go over your bank statements right now to get a good hard look at your lifestyle. Pore over the last 90 days.
Right now, when you’re not in a position to spend money the way your bank statement shows you have, you’re going to shake your head. You’re going to think, “I really didn’t need to eat lunch outside of the house that day, I could have brought it.”
Thoughts like that are a good thing, not a bad thing. We live in a “flex society” that focuses on showboating money and expensive things, but it builds this false narrative that we require those things to continue to be happy.
You can live frugally and be happy at the same time. It’s not only possible, but it’s one of the most common habits of millionaires in America.
3. Your Location
Rent goes up, the wage stays the same, and your location gets more expensive even though you didn’t do anything.
Welcome to locational imprisonment: not having the right amount of money to stay in your location, but not having the right amount of money (because now you’re broke) to move somewhere cheaper.
Most people stay in one location, if they’re renting, because it’s close to work and their lifestyle depends on it.
Even if you’re living frugally, it’s hard to just relocate when you factor in all the moving costs, deposits on new utilities, and other variables.
But if you own, you’re in a good position.
Homes generally do not go down in value, at least not permanently. We’ve seen nothing but a consistent price increase in the average home across America over the last decade, accounting for the 2008 housing bubble. It’s unlikely that we’re going to run into that same type of issue again.
If you own, your rent won’t go up, but you’re still subject to your cost of living going up.
Utilities can rise if your citywide average consumes more power, the internet can get more expensive because they update their infrastructure (because now you have a lot of people using their bandwidth), and so on and so forth. Not to mention the average cost of groceries, by the way.
The one way that location can actually work well for you is if you’re planning on selling. If you own a home in a specific town or city that’s getting more expensive to live in, it’s your chance to see where it goes, and cash out while the going is good.
Home prices can raise 20% of their initial value, up to 30%, depending on the area and how long you wait. An up-and-coming neighborhood costs more than a generally unknown neighborhood, primarily because there are fewer opportunities in smaller areas.
But if you bought a $125,000 home in that area before it was up-and-coming, and now the population increases and there are more businesses, your price is going to rise. You could end up selling that home for $175,000 down the line, pocketing $50,000 while virtually having lived there for free.
You can’t save if your income doesn’t allow it.
I’m not going to tell you, “You should have gone to college if you wanted more money.” We’re finding that more and more, skipping college altogether can be more profitable than getting a degree in the first place.
It’s been proven that having the ability to jump from one income source to another (switching ground-floor positions from your current job to another company) can actually prove better in the long-term for your payment structure than staying with that company.
Businesses are, well, businesses—they value you based on how much money you can make for them. Even then, they want to keep their payroll low, so they’ll pay you as little as possible if they can get away with it.
Four years of experience in an industry that you enjoy, while earning money, can be more lucrative and beneficial in the long haul than college.
It’s better to enter a new position at 22-years-old with four years of experience and confidence than entering at an entry-level position with dreams and no way of achieving them.
Your income is going to define everything moving forward, and since your income hopefully will not stay the same, so you will need to adjust your retirement goals based on your income.
If your income increases and you have leftover money, you can invest those dollars into your retirement funds to reach your retirement goal sooner.
5. Your Health
I’m not trying to sound like a fitness magazine, but when you invest in your health, you invest in yourself.
It not only lowers healthcare costs (like insurance premiums) as you go on, but it also ensures that you’re not going to get sick, at least as much as you can ensure that, and miss out on income. You don’t want to dig into your emergency fund if you can avoid it.
This means investing in better food choices and viewing gym memberships, personal gym workout equipment, and spending time away from the desk to cycle, weight lift or jog is an investment. It really is.
It doesn’t matter if you’re hustling and you don’t want to get away from your desk, you absolutely need to.
Invest in your health today, and save money on your healthcare costs in the future. It’s that simple. While you can’t completely curb all issues related to your health, diet and exercise can combat most issues that the average American is running into during their 30s and 40s.
6. Your Investments
Even if you’re more of a conservative spender, that’s okay—there’s a lot of low-risk investment opportunities available that have a decent yield when it comes to interest.
Investments can get tricky because you want to make sure that most of them are non-taxable. Even if some are taxable, as long as you don’t touch them, you don’t have to pay taxes on them during the year.
If you can put money into a Roth IRA account, it counts as an investment and in some instances, a tax break. It ends up working in your favor.
Investing the right way and not withdrawing from those investments unnecessarily can keep you safe from major tax downfalls, and protect your money while you approach retirement.
Among the most important factors that roll into your retirement will be investing. A Roth IRA is your best bet for retirement, but if you’re offered a money match for your 401(k) through your employer, then I have news for you.
Take it. Max it out. Whatever your employer will match, do your best to invest it.
This means that if you can invest $2,000 a month into your 401(k) with an employer money match, they’ll put in $2,000 as well. That means you save $2,000 right now without being able to spend it, and your employer dumps the same amount in.
It’s free money. If you’re smart in your life and don’t get into major debt, and you can cash out at 59½ like you’re supposed to, you can make an insane amount of money. It will be taxed coming out of a 401(k), but you’ll still end up with a profit.
How Much Should I Have in Total?
Utilizing all of the information laid out above, find out how much you are spending on necessities.
That could be college, groceries, vehicle care, home care, etc., and add it all up. If you’re spending an annual $12,000 per year just to survive for bills and food, then account for that. Account for that with the price of inflation (which we’ll cover in a minute).
If you’re planning to retire at age 60, you want to have enough money to live for at least 15 years with no worries. That number would be $180,000 in total before accounting for inflation.
You can achieve this through real estate investing, CD accounts, high yield interest savings accounts, stocks, municipal bonds, crowdfunded real estate investing, and other methods. Seriously, you have so many options at your disposal.
The goal is to have that lump sum to cover you from the age of 60 to 75.
However, you’re likely to live beyond 75. Don’t worry; you’re not going to be out of money at that point.
You should still have some money in investments, including real estate and definitely in annuities, which can give you a structured income while you earn up to 2.5% interest on your own money.
An average $100,000 annuity will give you roughly $18,000 in profit, all just so that you can receive monthly installments of money (a structured income); you have relatively no additional responsibilities once you establish that annuity.
15 years of money in a lump sum to live off of, and investments that are adding to that money (hopefully, in high yield interest savings account in the background, accruing for those 15 years).
That way, you can live comfortably even if you live past the age of 75.
Accounting for Inflation
At your disposal, right here on the internet, you can find the Bureau of Labor and Statistics survey information that dictates the CPI across the United States.
If you don’t know what a CPI is, it’s standard for Consumer Price Index.
This is the cumulative amount of money that the average goods have been raised by. The BLS takes into account thousands of different, important, critical items that we use every single day, and the average cost at which they rise on a regional level.
The CPI is always changing, but when you can find the average of that CPI, you can adjust your income accordingly.
You want to do your best to predict an annual CPI change, and apply it to however many years you have set your retirement savings goal for. If you pay $1.20 for a pack of bagels now, with a 2% inflation rate, you’ll be paying $1.221 per bag next year, and so on.
It’s Unwise to Retire Without Investments
Retirement isn’t cheap.
Inflation will always be hot on your heels, and we never know when the next big financial crisis is going to be in the United States. Being prepared ensures having food on the table, that the mortgage is paid, and that you’re not scrounging by when trying to be charitable.
Investments are important. We have a complex financial system in place, but with so many chances for low-risk investing like never before, we stand at the best possible position, as a collective, to invest our money in an intelligent way and enjoy retirement without constantly being on the brink of poverty.