Tuesday, April 14, 2015

Retire Early 2: Can You Afford to Retire?

Can you currently afford to retire?
I'll give you my answer now, so you don't need to read the rest if you don't want to. Take your current savings and divide it by your yearly cost of living. That's the back of the envelope way to calculate how many years you can survive without working. If your calculation can get you to age 70 or so, you're probably good.
It can be more complicated than that, but that's the basic formula I use.
If you can afford to retire now, then handling retirement becomes your next job. That will take a while, so relax, and get used to the idea of making your retirement work. We'll discuss that in a future chapter.
If you can't afford to retire yet, then you need to do some planning - and we'll look at that soon, too. Right now, let's see what it takes to retire in the USA in today's current economy.

***
Have you saved $2.4 million US dollars? You read that right. That's what some pundits say it takes to retire comfortably in the USA. Some say it takes even more.
That's a steaming pile of something, but it isn't money. Sorry to be so blunt, but there it is.
Some people couldn't retire even with that much money. Some people always spend more than they make.
Did you catch that? The inherent answer to the question: When can I afford to retire?
Answer: You can retire when your expenses are less than your income. If your investments and passive income can cover your expenses, then you're set.
The government will not help you retire. You read that right.
According to the Social Security Administration, the average social security check for retired workers is $1,294. You don't get access to that money until your later sixties - so that isn't early retirement. Even Mr. Money Mustache needs about $2,000 per month - and he's badass about retirement (he says so).
Social Security isn't designed to let you retire early. In fact, if you don't do some planning, your Social Security paycheck won't even cover your normal retirement costs in the future. Oh, and the SSA expects you to retire later and later each generation. Ouch.
It's up to you. You have to plan for your own retirement.
Since it's up to you, why not plan to retire early?
On less than two million dollars in savings.

***
You need money to retire - but only enough so you don't need to go to work.
You don't need enough money to travel the world, first-class. That's the trap set for the common man. We are trained to think that retirement is jetting to Rome for Easter and Germany for Oktoberfest. As much fun as that might be, that isn't what you're planning for, is it? If it is, you want to be rich, not retired.
Since your Social Security check won't cover your relaxed retirement, how much money do you need?
A lot of financial companies will help you to invest your hard-earned money with them and they will help you to calculate your need. They charge a modest fee for the financial wisdom they share with you.
Look, the only winner there is the financial company. They'll tell you "it's complicated" and "there are eight factors to consider" (or similar). Here's what they say:
If you make $50,000 per year, then by age 35, that's how much you should have in savings. By age forty-five, you should have $150,000 in savings. By age fifty-five you should have $250,000 in savings. Then you can have the eight times a yearly salary ($400,000 in this case) that you need to retire at age sixty-five.
The math works, but it doesn't help you retire early.
All the early retirees will tell you the same thing - save as much as you can, as early as you can and as often as you can.
Bottom line: if you spend all you make, you'll never have enough to retire.
The more you save, the earlier you can retire.
So it boils down to another simple financial rule - spend less than you make. (I call this the One Rule.)

***

You can, and should, plan for your own retirement.
So there's the simple answer to how to retire early: save enough so that you can cover your own expenses until you die. It is a simple answer - I didn't say it was easy.
Let's take some real numbers:
Our expenses run us about $3,500/month. That includes our currently outrageous health care costs, as well as our taxes and insurance on the house. That doesn't include two first-class tickets to Italy. That would be extra.
We're working on whittling some of these costs down.
I thought those costs were pretty routine, but an article in 2014 in USA Today states that the average income needed to live the American dream is a little over $130,000/year. What?
They state that the basic expenses only run about $58K per year, which still seem outrageous to me.
Mr. Money Mustache even has a blog entry where he talks about people complaining about how they can't afford to live on their enormous incomes.

I like Mr Money Mustache.

I'm 57 years old. If I divide our savings by a yearly expense of $42,000 (still too high, but we're working on it) I easily have enough to get us to age 70. That made me comfortable, but I'm an engineer - I like numbers.
Besides, I can make some minor modifications for my own personal calculations - and you should, too.
As a retiree, I have a monthly pension of almost $2,000. That means my savings needs to only cover the $1,500/month difference. Dividing my savings by the new requirement of $18,000 leaves me with enough money to easily get to my Social Security pension, which will cover these additional monthly costs.
At that point, our savings becomes money that we can spend as we wish. So I can afford to retire at age 57 on much less than a million dollars.
We're not flying to Italy this year, though we could build that into the budget. I'm not entirely comatose, either. I'm still writing my books, and learning about publishing and distribution, so we might get extra income from that endeavor at some point.
That would be gravy.
We're not traveling the world and living in the Ritz, but I'm not driving to work every morning either. I could have waited another ten years to retire and my pension would have gone up a couple hundred dollars.
For ten more years of aggravation? I think not.
I'd rather pursue something I like doing.

***
At five o'clock this morning the clouds opened up and we were deluged with a spring storm. The water ran in the streets. I could only imagine the traffic on the route to work.
That's all I had to do - imagine it. I no longer drive to work every day. I do some of the things I always dreamed of doing, but I have to admit that most of my time right now is spent organizing my life to fit retirement.
It takes some effort. It's a different mindset for me.
Saving money is a different mindset as well. Cultivate it and learn to track your progress and you can retire early - and do the things in life you want to do.
If you did my back of the envelope retirement calculation and you can retire, congratulations! You have a new world to explore. I'm working on that now, and I'll give you some pointers in the future.
For the rest of you, you need to start planning.
What do you need?
You need to know your monthly expenses. Really. Go through your checkbook and figure out where your money went over the last few months. Most people find they spend way too much money on eating out. Don't beat yourself up over it - the first part of taking control of your finances is to understand your finances.
Here's the common categories people have in a monthly expense record. Fill in your own numbers and in the next post we'll see what we can do to find money to save.
Your savings will pave your way to early retirement. Let's get to it.

Rent or Mortgage:
Home taxes (per month):
Home insurance (per month):
Food expenses (not fast food or eating out):
Auto expenses:
Medical expenses:
Education expenses:
Utilities:
Clothes:
Entertainment:
Eating out:


In two weeks, I'll have another post for Retire Early.

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See you soon!
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