The last two weeks the stock market has been on a roller coaster. If you are like me you have watched it with acute interest. We are up one day and down the next. All of this volatility hasn’t changed my plan at all. I didn’t sell any investments or anything. I actually wish I had more money to deploy so I could buy some of these items that are on sale. That is ok because I know that in the long-run my strategy will pay off.
Since I have spent the last week talking about investing I figured this week’s financial tip would tackle how much you should invest. Now I don’t mean percentage wise. I mean what should be your ultimate goal. I think that people should save a minimum of 15% of their income to achieve some semblance of a good retirement and more if you can. But at what point do you have enough to call it quits? What is your number?
Financial Rules of Thumb
When you are calculating what your specific number is there are various rules of thumb to consider. The most common rule of thumb is that you should have 25 times your earnings saved in order to retire. The reason for such a number is tied up in what is called the 4% rule. The 4% rule was an experiment/paper written in the 1990s that stated that if you took out just 4% of the money you saved per year than that nest egg would last you at least 30 years or so.
Since then the 4% rule and savings 25 times your income has become the go to rule of thumb.
However, 25 times your earnings is a lot of money. So others have developed some others tools. For example, Fidelity argues that you only need 8 times your earnings, which seems to be much more manageable. If you include your social security income and any kind of part-time income Fidelity’s rule of thumb doesn’t seem so bad.
Other financial publications state that you should save 12 times your income to have a comfortable retirement.
So the question is then which is it? Is it 8, 12, 25, 50, what? How much should you save? That is a good question and I don’t have the specific answer because it differs for different people. There are some other things you have to consider with these rules of thumb:
- Will you continue to “work” in retirement or if you achieve financial independence? My goal is financial independence and potentially to retire early, but that doesn’t mean I will stop “working” or at least earning a paycheck. I could see me teaching, at least part-time, for the rest of my life. I love it. I love the classroom. I love the students. It invigorates me. So I may stop full-time someday (maybe soon..and by soon I mean within the next 10 years or so) but I certainly anticipate “working.” Just because you are “retired” doesn’t mean you play shuffleboard. We need to redefine what it means to retire anyway.
- Do you have any debt? My goal is to have ALL of my debt paid off before I would become financially independent or retire. That way I wouldn’t have to worry about larger expenses and I could maybe live on less or worry less about things.
- Perhaps the biggest thing that we don’t consider is our spending. Perhaps, the above rules of thumb should focus more on how much we spend than our income. For example, if you make $100,000 a year, but you only spend $50,000 then by any of the rules of thumb you go by you can save MUCH LESS and live comfortably. In other words, I could save $1 MILLION instead of $2.5 million or $600,000 instead of 1.2 million or whatever the number is. The problem with this is it can be harder to calculate our spending. The reason is that as we make more money we tend to INFLATE our lifestyles. We just “need” those new dishes or new car or whatever because we have some more means than before. That is the wrong way to look at things, particularly if you want to retire early. Living a much more minimalist lifestyle to do other things is certainly fine with me.
- You have to also consider the kind of spending as you get older. For example, if you retire at 55 and spend the next 25 years or so galavanting across the country that will cost much more than say when you are 80. When you are 80 you will probably just be happy to go to a movie or get out of the house. We just don’t spend as much money as we get older. My grandmother who died almost 10 years ago loved to go to the casino. However, she loved it, not because she gambled a lot, but when she was in her 80s and 90s that was a form of entertainment. She was surrounded by people. And she could go for hours on $20. She didn’t spend a lot of money at all because she just liked being around people. And she had a fairly comfortable retirement.
How to Calculate Your Number?
In my opinion I think it is best to use a combination of spending/your earnings. For example, if you earn $50,000 and spend $40,000 then half the difference and calculate from there what you need. For me the 25 times your expenses is the best rule, but I can understand others using different rules of thumb.
When you are calculating these things you have to factor in a couple of items: 1) Will you have debt when you retire? Do you want to have debt? That will impact how much money you spend? 2) How much do you spend on debt now? When I calculate it out Mrs. ROB and I spend over 60% of what we earn on debt payments….student loans, car payment, mortgage, personal loan, etc. It is important to factor that in because it will impact how much you are actually spending. 3) Once you have done that then calculate what you need.
Based upon what I have calculated between the two of us I believe that if Mrs. ROB and I saved 1.5 million (maybe a little less) then we could retire with some ease. That is contingent on a couple of factors: 1) us paying off our debt, particularly our house, which would reduce the amount of our household expenses by upwards of $3000 (if you include my personal loan and student loan). That is huge. 2) Once you take that out the equation Mrs. ROB’s and I’s expenses would be about $900 a month for taxes, insurance, utilities, cable, and the like. If you add on another amount for food, gas, and other expenses we could probably get by fairly easily on $60,000 a year in gross income.
That number will likely go up just because of inflation, but I also put in a bit of a cushion there for travel and other expenses. So for me about 1.2-1.5 million is my goal. While that sounds like a lot of money and it is I think it is certainly doable, particularly if the market just behaves itself on average. We should be able to save that much and maybe more in the next 10 years (I hope).
So the question for you is based upon your lifestyle how much do you need? BTW, consider this we all say that we will do all of these things when we retire, particularly when we are young. I stated that I will do nothing but travel to exotic places. That is true I want to travel, but I also like the stability of home. I like having holidays in a house, being surrounded by family, etc. So a lot of what we supposedly want will change over time. Just something to consider as you ponder this question.
And if you have hit your number and unless you love your job why are you waiting. You are financially independent. You have the means and time is our most precious commodity. Use it to its fullest.