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3 things That Control When you Retire

Today, a friend of mine lamented how she wished she could retire now, but can’t afford it.  Neither can I retire today, unless I can live on much less than I do now.  The conversation made me think. How ready are most of us to retire when we want to retire?

This is just a philosophy and numbers game, that can include entrepreneurial money generating ideas, lifestyle changes, investment fundamentals or all of the above for early retirement.  When you can retire is as simple as how much you save compared to how much you spend to live. 

If you now spend 100 percent (all or more) of your income, you will never be ready to retire, unless someone else provides retirement money, such as wealthy parents, social security, pension fund – notice the lotto was NOT included in the list of potential substitutes for savings.  You will need to work or generate income your whole life, if money is not set aside.

UNLESS…

If you spend 0 percent (none) of your income – maybe you live with someone else who pays for housing, food and other sundries and you can maintain this spending level; you can retire now.  Congratulations!  You do not need to continue to generate income when you spend nothing.

I do not know anyone who spends nothing, and the older we get, the more health expenses we are likely to incur, so let’s talk about how much to put away, for a real retirement plan.  Saving for retirement is relative to three simple numbers;

  1. How much is your annual take home pay?
  2. How much can you live on? 
  3. When do you want to retire?

You can figure out how much to save from each paycheck  You need to know your income after tax & other deductibles, or take-home pay.  Since W-2s are due now just look at the net pay for the year after deductions.  Consider how much you spend each year (Use your bank statements to add up how much you spend each year including all the little withdrawals and ach transactions you make.) Subtract what you spend from your take home pay…hopefully this is a positive number.  If not, see steps to debt reduction here. 

When do you really want to retire?  Today’s life expectancy is on average eighty (80) years; if you want to retire at fifty-five (55) years, you will need to have at least twenty-five (25) years of funds to live on.  Take the amount today that you spend each year, without even considering the additional medical costs of the future, and multiply the number by twenty five (25).  If you are spending $60,000 per year now, you would at the minimum need to save $1.5 million.  See?  Pretty easy.  By investing or saving the money in an interest bearing account, it can grow to keep up with inflation. 

Disclaimers:

This approach ignores rising cost of living and these numbers are pessimistic on life expectancy – no one wants to run out of funds before running out of years left.  Also, your expenses today may be much lower today than in the future when you have expensive medical care or medical insurance requirements.  Happily, if you have already started a retirement account, or your employer has one set up for you through a pension fund etc., then the amount you need to contribute to it can be significantly less.  

Too convoluted?  Check out this cool retirement calculator on networthify.  And put in your numbers to figure out how to reach your retirement goals.  Be sure you include any 401K or other retirement account.

Shortening the Years until Retirement, Begins with Setting Goals:

The most important piece of information to take away from this today, is to look at your future needs, set your goals and put your retirement goals in writing.  You will be 30 times more likely to reach those goals when you do that.  Be specific and include the timeline in which you want to reach your goals.

More Income Allows Faster Goal Attainment:

If the numbers look impossible to hit, then it may be time to figure out how to raise additional income.  Some become tutors, some sell unwanted items online, others get a part time job.  You know yourself best, be realistic about what you are willing to do to reach your goals and enact your retirement plan with that in mind.  You may be able to move up your retirement date if you add to the savings. 

Or Cutting Costs Can Shorten the Road to Retirement

If additional income isn’t realistic, consider cutting costs.  Find lower costs Cable provider, or dump the cable but keep the internet.  Start with putting the numbers in writing, and figure out where you can cut.  Just saving an extra $100 a month for the next ten years is $12,000 before interest is added on.  It all adds up, and before you know it, you could be there!