The other night over dinner, I was talking with my wife about what it would feel like to retire young.
We could visit exotic places, spend time reading books, and reconnect with old friends.
I even began thinking through how much this would cost us.
Our conversation drifted elsewhere, but the idea remained with me. As I was lying in bed later that night, I began crunching the numbers.
How much would I need for health care, housing, transportation, and so on…
The next day I opened an Excel spreadsheet and calculated the precise amount.
Turned out, it was a great exercise. Now I have a better idea of the costs I can expect in retirement and more relevant saving goals.
I think you should do the same.
Here… let’s walk through it…
Let’s identify the magic number. How much money do you really need to retire?
And The Magic Retirement Number Is (Drum Roll)…
According to the U.S. Bureau of Labor Statistics, the average American spends $45,756 per year, or $3,813 per month, in retirement.
That seems like a reasonable figure. Here’s how it breaks down:
- Housing: $1,322
- Transportation: $567
- Health care: $499
- Food: $483
- Insurance: $237
- Charitable donations: $202
- Entertainment: $197
But your costs don’t necessarily need to be that high.
If you own a home, for example, you can easily shed $1,000 per month of your budget.
Transportation is another expense you can control and reduce. Overpaying for a car is a common financial mistake in retirement, but there’s no reason for you to make it.
If you reduce those two big-budget line items, you can get by with a mere $30,000 a year, or $2,500 a month.
Now let’s crunch some numbers to see what your savings plan should look like to get you to that level of retirement income.
Here’s A Simple Retirement Savings Plan
Let’s first look at two possibilities—Scenario A and Scenario B.
In Scenario A, you need to earn $45,756 every year. In this case, you would need $915,210 of investment capital. You could place that sum in a vehicle paying 5% yearly interest. Assuming no costs associated with the investment, that 5% yield would get you the annual income you need.
This might seem like a large number, however, with a proper savings plan and help from the power of compound interest, anyone can get there.
Let’s say you’re 35 and you want to retire at 55. You would need to invest $2,155 per month, or $25,860 per year, at a 5% interest rate to have $915,210 of investible capital you need to fund your retirement.
If, however, you have 30 years to build up your investible nest egg, rather than 20, then you would only need to set aside $1,042 per month, or $12,504 per year.
Now, for Scenario B, imagine that you’re living in a home you own and driving a car that’s within your budget. In this case, all you need is $30,000 of income per year. To earn this, you need only $600,000 of investible capital.
If you’ve got 20 years to build up that nest egg, your monthly savings amount should be $1,390. If you’ve got 30 years to create your nest egg, you only need to set aside $665 per month.
Moral of the story?
Create a plan and start saving ASAP, no matter what your age.