Do any of you read Entrepreneur Mag? If not, and you like that kinda stuff, it’s definitely worth picking up (same with Inc.). Most of the articles are about growing your own biz or learning how to start one, etc, but my favorite section out of each issue is slowly becoming the one called “Your Money” (Surprise surprise! Haha…). It’s not like I don’t get enough from all the other magazines or blogs I follow every day, BUT there’s something about this one that always sticks to me and inspires me days later. And you know what’s cool about it? It’s written by another personal fiance blogger we all know!! J.D. Roth from Get Rich Slowly – making it even more interesting ;)
Anyways though, in a recent column he did for June’s issue, he was talking about how most of the gurus out there base their retirement recommendations on X percent of your current income – usually around 70-80%. So if you’re making $100K these days, and you wanted to retire tomorrow – you’d need to have, say, $70k/year to maintain your current lifestyle. Which probably sounds familiar as that’s what I’ve heard all my life too, pretty much, but J.D. switches it up and says these calculations are missing a pretty important piece — your SPENDING habits! That’s what determines your lifestyle down the road, not your income. He also says “basing your retirement goals on your income might lead you to save too much, meaning you could have used that money to enjoy life when you were younger.” Not something you hear much out of a finance guy ;)
Obviously saving up “too much” money would be a great problem to have, but I agree that focusing on what you spend your money on, and understanding the costs of your lifestyle as it goes on, is a much more realistic way to determine how much you’ll need later when it’s time for “retirement.” (I put those in quotes cuz I doubt there will EVER be a time I want to stop and do nothing! ;) But the good thing about money is that it gives ups the option to change our minds whenever we want!)
Two people making $X amount every year will have completely different outcomes as to where that money will go in the end, so you need those expenses factored in to better put things in perspective. We all know people making 3 or 4, or even 10 times the amounts we make but are STILL barely scraping by and making ends meet! 70% of their income might not even be enough for them down the road, whereas others who are more frugal (*ahem*) could realistically live off 40%. Your income is still important, but it’s just one piece of the entire retirement puzzle.
If you’re interested in the different ways to calculate this kinda stuff, check out some of the tools J.D. recommends for tightening up the game plan. I’m gonna join you and play around with a couple of them too :) (Cuz we’re big nerds like that!)
- T-Row Price calculator — It bases the results on exactly what we’re talking about here: spending over income.
- The Motley Fool — There are two good calculators there – one that estimates your retirement expenses, and the other which gives you an idea if you’re saving enough.
- FireCalc.com – which he says is pretty overwhelming at first, but it’ll give you an idea of how safe (or risky) your retirement plan is based on how it would have fared in every market condition since 1871 (Cool!!).
Only time will tell how much we’ll TRULY need 30-40 (to 60?) years from now, but by putting plans into motion now and staying on top of it, we’ll be a LOT better off when the big day comes! And if you can get there with NO mortgages or loans too, you’ll be sittin’ even prettier… hopefully next to your friend J. Money ;)
(Photo by cogdogblog)
PS: Some of my favorite tools:
|Personal Capital (FREE) -- If you’re looking for a robust financial tracker, Personal Capital is the way to go! They’re like Mint, but on steroids and have much better tools for investment and net worth tracking. // Full review|
|Digit (FREE) -- A super easy (and automated) way to save. Every day Digit analyzes your income and expenses and will push money aside for you any time it sees extra sitting there. I've saved over $4,000 myself using them so far! // Full review|
|Acorns -- Having trouble finding money to invest? Check out Acorns – they round up all your transactions to the nearest $1.00 and drops the difference into an investment portfolio for you. Easy way to start investing! // Full review|