When I think of retirement, I think of spending a month traveling throughout Asia tasting exotic cuisines. I want to go fishing in Alaska with my buddies and send my grandchildren to college. I want to surprise underprivileged children with presents on Christmas, donate to cancer research and leave an inheritance to my children. More than anything, I want the freedom to do what I want to do. I want to enjoy retirement. It is a goal I am working diligently towards.
In fact, when I talk to people about retirement they also have lofty dreams. However, digging a little deeper, they are not putting in the hard work. They may not have a plan or simply may just not understand the math behind it. An article I read in the Wall Street Journal stated that only 45% of Americans are saving enough to meet their basic needs in retirement. That means 55% of people will not be able to retire! For me, meeting my basic needs is just not good enough. If I am retiring only to sit at home on a tight budget, what is the point?
Of course every person’s budget will vary – some may want to travel Paris in first class and others may want to buy a camper and stay for a week in Yellowstone. You may not be the traveling type. Perhaps you like fashion or cooking. Maybe you like fashion and traveling! Either way, even if your ideal retirement would be staying home and cooking every day, you still want more than just your basic needs met. Especially if you want to eat a choice ribeye with foie gras melted on top with a nice Cabernet. No culinary enthusiast would want Hamburger Helper. If you have plans to be grandparents do you want to take the whole family out to dinner? Do you want your kids to foot the bill? What about spoiling the grandkids? I can’t wait to get my grandchildren everything I wouldn’t buy my kids. All of this goes beyond “basic needs.”
So you are on board? You want to have a nice retirement? Start today! Waiting is very costly. To get your first million by 60, a 25-year-old needs to save $3,700* each year while a 35-year-old would need almost triple that. A million dollars is nice. It would certainly meet most basic needs, but it wouldn’t provide the lifestyle you want. Many people target that $1,000,000 mark, but if you use the old 4% rule of thumb you would be living off of $40,000 each year. My trip to Asia would cost more than half of my annual budget. Oh, and by the way, I said 60… that’s right. Who wants to work past that?
So, how do you do it? If you can save $10,000 each year starting at 25 you would be able to live comfortably off of $110,000 each year and leave over $2 million to charities or children. Again, at 35 that number more than doubles to $25,000 each year. If $25,000 sounds like a lot, it is. The average household earns roughly $50,000. It really depends on how committed you are to your goals, one could save 30% of one’s income by making some important life choices. If the household income was $50,000 and $15,000 went into retirement savings you would have about $35,000 to live off of (taxes would be minimal in this scenario). Hey, a lot of people live off of less! The earlier you start, the easier it is. The, “I want to enjoy now,” argument doesn’t make sense to me. Would spending $5,000 dollars today make you happier? Just know that is $140,000 you won’t have when you are 60.
Though the example may seem a bit extreme, the point is you could save more than you are saving today. Talk to a financial advisor and figure out how to make your retirement dreams a reality. Yes, the amount you need to save each year will be more than you wanted and you will have to make it a priority, but ask yourself how you want to spend your retirement. If Denny’s breakfast sounds like a special occasion then upgrade your car to the premium audio package today. If you can tolerate factory speakers though, I’ll see you in Thailand!
*Assumes a 10% real rate or return.
These examples are hypothetical only, and do not represent the actual performance of any particular investments. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and when sold or redeemed, you may receive more or less than originally invested.