When do you think you’ll live till? 60? 70? 80? According to Fortune Magazine, most people underestimate how long the’ll live for.
American men born today can expect to live 76.5 years, on average, and American women 81.3. But those numbers reflect life expectancy at birth and are dragged lower by people who die young. By the time you are in your fifties, you have already outlasted everyone born the same year as you who passed away under untimely circumstances.
This means the life expectancy is higher than originally thought at 76.5 and 81.3 for men and women respectively. So if you plan to retire by 40, then you need to fund the “first” 25 years of your retirement and then your “second” 25 years of retirement for a total lifespan of 90 years. So how will you fund both retirements?
Here are some key strategies to take into consideration.
First Retirement Funding: You should be funding your first retirement through your paychecks (after-tax income). When people talk about their savings rate, they are referring to amount saved divided by amount paid in your checking account from your employer (or Net Pay on your paycheck stub).
You should be aiming to invest and save $1 million assuming the 4% withdrawal rate. This means for the next 25 years, you should be withdrawing 4% from your $1 million nest or spending no more than $40,000. Obviously there are some years that are more bullish (market is doing really well like 2017, for example), and you can afford to spend a little more than $45,000. However there are some years that will be bearish (market is doing badly like 2008, for example), and you should refrain from spending anymore than $35,000. Ideally, the average spending of your 25 years will roughly $40,000/year. Also, the $40,000 should be sufficient to take care of 2 people, so you may not need as much saved if you are saving for 1 person.
Assuming you start at age 25, saving for a million sounds daunting and seems almost impossible within 15 years (you’re looking at saving $66,666 per year) . Not many couples can afford to save that much nor earn that much in Net Pay per year. This is where investing comes in. So how much do both of you combined need to save so that you can use the savings to invest?
|Average ROI||Years||Monthly Savings||Annual Savings|
|5%||15||$ 3,741.26||$ 44,895.12|
|6%||15||$ 3,438.56||$ 41,262.72|
|7%||15||$ 3,154.94||$ 37,859.28|
|8%||15||$ 2,889.84||$ 34,678.08|
|9%||15||$ 2,642.66||$ 31,711.92|
|10%||15||$ 2,412.71||$ 28,952.52|
Now this sounds a little more do-able, right? While I do show an average 5% return, that’s not typical. That means for the last 15 years, the world economy has slowed significantly or has had a really really long recession. Most people look at an average of 7% on their overall 15 year investment. This also means that you have a reoccurring schedule to take the savings and invest. Check this post for those who are just starting out in early retirement and learning to invest for it.
Test out other scenarios using this website if you find that maybe you need less than $40,000 a year to live on (saving for 1 person as opposed to 2), which in that case will reduce how you much need to save. For example if you only live on $25,000 a year, then $25K x 25 years = $625,000 in total savings and investments combined.
Second Retirement Funding: Focus on employer’s and your contributions! I’m assuming that you will be employed for the next 15 years while saving for the First Retirement Fund. Most companies offer some sort of 401K matching, pension, profit sharing, and etc… In those 15 years, you need to maximize your contributions. If you’re lucky and your company offers a pension and/or profit sharing, you can reduce the amount of 401K contributions. Also, there are so many opinions on social security and whether or not it will still exist by the time we are eligible for retirement, the best you can do is don’t rely on it.
Now, figure out the percentage that you need to contribute to your 401K. How do you determine your contribution rate to achieve $1 million by 65? Assuming you started contributing at age 25 with a $0 balance, you can see below the percentage need to contribute. Slash the percentage in half if there are 2 of you contributing.
|Average ROI||Years||Monthly Savings||Annual Savings||50K Salary||60K Salary||75K Salary||90K Salary||100K Salary|
|5%||65||$ 1,666.67||$ 20,000.00||40%||33%||27%||22%||20%|
|6%||65||$ 1,500.00||$ 18,000.00||36%||30%||24%||20%||18%|
|7%||65||$ 1,333.33||$ 16,000.00||32%||27%||21%||18%||16%|
|8%||65||$ 1,208.33||$ 14,500.00||29%||24%||19%||16%||15%|
|9%||65||$ 1,000.00||$ 12,000.00||24%||20%||16%||13%||12%|
|10%||65||$ 875.00||$ 10,500.00||21%||18%||14%||12%||11%|
Remember the chart does not include the company matching. So if your company matches up to 4% and you make $75,000 a year, then you only need to contribute 14% for a 7% ROI. If your company also offer pensions and/or profit sharing, then your contributions are even less!
These two strategies need to happen concurrently during those 15 years you are working. While it sounds painful and you aren’t left with money to spend at the end of each month, you are investing in the next 50 years of life to find financial independence. Also, you get used to living frugally and find that after you retire, you can continue this lifestyle that will clarify the important things in life. Good luck!