Do you know where your financial journey is taking you?
If you stay on the path you're on now, where will you end up?
If you don't know the answer to that question, then you're on the path to somewhere, but maybe not the place you want to go.
Know Your Current Destination
Think about your life as a 65 or 70 year old. Think about what kind of house or rental you'll want to live in, the type of community you'll want to be a part of, and maybe do some research on how much those assisted living places with happy hour every day cost.
Here's a hint: they aren't cheap.
In order to understand where your current journey is taking you, you need the following information:
- How much you're saving each year (401k, Roth, Post-tax savings, etc.)
- The rate of return you're earning on your savings
- How many years you plan to continue working
After you identify those three parameters, plug them into the future value calculator below to determine how much savings you will have at retirement:
Once you know the amount you will have at retirement, calculate how much you can draw each year and maintain your nest egg. The common rate to use for this is 4%.
For example, if you have a nest egg of $1,000,000 at retirement, you can (theoretically) draw $40,000 per year without decreasing the value of your nest egg. In addition, you may be able to plan for some social security payments as well.
Although social security will probably not pay as much post-2035 as it did before, it would be a drastic move to let it run out entirely. A conservative estimate is to plan on receiving half of what your current social security benefit projections show.
For example, if your current social security statement projects that you'll receive $2,000 per month at retirement, plan on receiving $1,000, or $12,000 per year.
In total, that will provide you $52,000 per year in income as a retiree. Does that seem like enough to you? If not, its time to choose a new destination.
Choose a New Destination
Once you decide to alter the course of your financial journey, the next step is to choose a new destination.
How much income do you want to have as a retiree? What type of lifestyle do you expect to have? Think about what you want your life to look like, and how much it will cost.
Do you want to be spearfishing every morning from the backyard of your coastal home? Or zipping around in golf carts with your retiree buddies, racing for the tee? Or how about living on your own homestead that you paid off while you were still working?
Create a budget showing what your expenses will be. Using our previous calculation, back into how much you need at retirement to support your lifestyle.
If you need $80,000 per year, and you think social security will pay you $12,000, then you still need to draw $68,000 per year. Divide $68,000 by 4% for a total retirement nest egg of $1,700,000.
$80,000 – $12,000 = $68,000. $68,000 / 4% = $1,700,000.
If you find that after calculating your required nest egg that your current financial journey will bring far short of where you need to be at retirement, its time to alter course.
Altering course involves a number of decisions, but may also encompass a lifestyle change. Basically, here are your options:
- Start saving more money
- Create a budget
- Change your spending habits
- Make more money (and save it!)
- Pay off your house, if you plan to live the rest of your life where you are now
- Plan for a more frugal retirement
Start saving more money
There are two primary ways to save more money – make more or spend less. Either way, you need a budget to follow to help you plan how to best use your money.
The next step is to change your spending habits. Most people can find some areas of waste to eliminate from their spending habits without giving up the things they truly love. Look for subscription services you don't use, vehicles you don't need, and the very best way to spend less money – pay off your credit card debt if you have any.
Paying off credit card debt is priority numero uno. To do that, you have to stop incurring it and start making mega payments every month until its gone.
Its okay to use credit cards, but only if you pay the full balance off every month.
Most people can find some areas of waste to eliminate from their spending habits without giving up the things they truly love. Look for subscription services you don't use or other things you are paying for that you don't use.
Pay off your house (if you plan to live the rest of your life where you are now)
How does the thought of free housing sound? That's what you'll have when your house is paid off. So if you plan on spending your retirement in your current domicile, pay it off asap. Then all those dollars you were spending on mortgage payments can be stashed away for retirement.
If you don't plan on living in the same place forever, start the process of deciding where you will want to spend it. Investing in a retirement home early could enable you to pay it off before you ever move in. You could rent it out for a few years or decades as a second source of income – the house may pay for itself.
Make more money
I've never been a huge fan of living an ultra frugal lifestyle. Instead, my approach has always been to pursue a bigger salary. I've done this through earning promotions and changing jobs. I've moved states twice for new jobs, and have zero regrets.
For some tips, read about how I tripled my salary in five years as a single Mom.
In your current career, if there are opportunities to advance, treat your job like a business and your employer like a customer. I've found this is the best way to prove your worth and add value to your company. Rewards typically follow.
If you don't have advancement opportunities, seek out a side hustle for extra income. This could encompass using a hobby to make money, launching a side business, or simply driving for Uber a couple of times per week.
Either way, more money means more cash to save – not more cash to spend. Keep your cost of living in check, and stockpile your savings.
step on the gas
Rev up your savings by investing early. By leveraging compound interest, you can vastly increase your nest egg.
There are three main kinds of investments, or “asset classes”: stocks, bonds and cash. There are other non-traditional types of investments like peer-to-peer lending and real estate crowdfunding that have the potential to produce nice yields with a compelling risk profile.
You can invest in stocks and bonds in one of two ways: by buying them individually, or by buying them via a mutual fund or ETF. A mutual fund is simply a collection of stocks, or bonds, or cash equivalents – or sometimes a mix of all three.
Most investors use online brokerages to buy and sell stocks, bonds, and mutual funds.
Dont run out of fuel
Staying consistent with your savings plan is important to reaching your financial destination successfully. Spending money is easy to do, and without a steady savings strategy, you could easily piddle away your intended stash of cash.
Use modern technology to automate your savings in one of two ways:
- Participate in your company's 401k plan, taking advantage of a match, or just contributing your own income. This will lower your tax bill, and you will not be tempted to spend what you're saving for retirement because it never touches your bank account.
- Set up an automatic transfer from your checking to your savings account each month. Make sure this amount considers your income and living needs.
Live within your means, and when your income increases, don't let lifestyle creep steal all of your extra dollars from you.