What’s plot got to do with personal finance? Everyone’s financial journey resembles a story arc, complete with plot twists, plot holes, drama, and conflict. We’ve gone through how to start earning money, and some tips for that. And there was a post on building net-worth, and the steps in accomplishing that. Now we’re going to talk about retirement, and how to figure out where that climax of your financial story arc is.
Ahhh, the golden goose. Or something. I imagine my own retirement will look more like a raggedly, deranged owl, but who’s to say?
Retirement seems like a pretty easy topic to tackle – you finish your working years, and you retire. Jazz hands, right? Sailing away into the sunset and lounging around relaxing all cool, shooting some b-ball outside of the school, when a couple of guys who were up to no good, started making trouble in the neighbourhood – I digress. But! Mr. Smith has a point.
You can be coasting along, minding your own business, get caught up in bad timing or emergencies, and end up having your whole life ‘flip-turned upside down’. You need to anticipate for the unexpected to happen, and do your best to avoid it, so you can retire and lounge back and deal with those trouble-makers without a sweat.
The obvious place to start, then, is figuring out how much money you need to retire.
The Math Behind The Number…
… which I’ll leave to the experts.
Mr. Frugalwoods, over at Frugalwoods says, “The simple answer is 4% a year from a portfolio of 75% stocks and 25% bonds.” You can check out his math here, but he seems like a pretty good math-er.
Mr. Money Mustache agrees by saying, “4% is a perfectly good answer, which means 25 times your annual expenses is a perfectly good goal to save for”, and you can check out the entire post here.
Now I suck at math. I’m really, really, really bad at math. But everyone seems to agree that to retire, you need about 25 times your annual expenses, and I’m inclined to believe them. I’ve read the math, I understand the math – I cannot explain the math. But I’ll wait right here if you need to go check for yourself…
What perspective I can offer though, is:
How to Calculate Your Annual Expenses
The first step to figuring out your finances, is calculating your annual expenses. This is every dollar and cent that comes in and out of your accounts, whether it’s from income, dividends, expenses, debt payments, trips for .05 candies for kiddos and adults alike. In order to figure out how much you need to save, you need to figure out how much you currently spend.
When I’m abroad, living by myself, I usually spend about $1,500 a month (which includes $600 – $700 in rent/utilities). Now, I wouldn’t want to live in crappy apartments with ornery roommates in my retirement, so hopefully by that point I have a place of my own, or rent a nice place.
But say I retire with my current lifestyle, how much would I need?
$1,500/month x 12 months = $18,000/year
$18,000/year x 25 (25 times your annual expenses) = $450,000 in stocks and bonds to retire
Grab a pen and paper, and figure out how much you spend each month. Take these points into consideration:
- Am I eating out as often as I will when I retire? (you might have more time to cook in retirement, or alternatively, want to eat out more)
- Will my transportation costs stay the same? (do you travel far to work? Or work from home and anticipate more travel when you have time to go places?)
- Will my vacation and activity expenses stay the same? (are you aiming for a jet-setting retirement filled with travel? Or a modest retirement where you stay home and read books all day?)
- Will I own my own home, or will I rent? (this might be a huge expense you no longer have to worry about if you own your home – but it will be replaced with regular home maintenance, which could run you just as much as rent)
- Will I have to invest in a health plan? (this is also different for those south of the border – but even in Canada, the cost of prescription drugs as you grow older might make insurance worth looking into, which will likely be paid out of pocket)
- Are you going to have family and friends you want to dote on, and be able to help support them? Are you going to want to be able to finance vacations, parties, and get-togethers?
How To View Your Retirement
Are you going to be sitting around at home doing nothing? Spend your time volunteering? Continuing your income generating AirBnB, coding business, baking hobby? Tending to a passive income project?
Retirement doesn’t have to mean you stop working. And if you’re planning on dabbling in some part-time work, your retirement figure might not be as high as you think it is. I don’t think I’m ever going to stop working, but how I engage in that work will likely shift the older I get. I think I’ll always be writing barring something crazy happening, and I’d like to work in the arts / organization and planning industry for as long as I find it enjoyable.
And who knows, maybe I’ll find something I like even more than that, like flipping houses or becoming an editor. Don’t pigeon-hole yourself into a future when you don’t know what that future will be. Life changes, things change, and while you probably have a good idea of where you want to be in retirement, keep and open mind and remember to be flexible.
When Does Retirement Happen?
The answer’s going to be different for everyone. I like to say that my parents are ‘basically retired’. If they walked away from their jobs today, I think their finances are in a place where they would be okay. But they keep working and saving money, investing, and take 4 – 6 weeks of vacation time every year. It’s what works for them, and they’re both waiting to ‘officially’ retire until they reach the age where they’ll be eligible for their pensions.
As always – be honest with yourself, with what you want, and how you can get there. Being raggedly rich doesn’t mean you deprive yourself of the nice things – it means picking and choosing what’s important to you, and seeing the value in things beyond the cosmetic. It’s all about priorities, and having the patience and determination to get what you want out of life.