On the Stacking Benjamins Podcast I was listening to today, Joe was talking about the responses he received when he asked his Twitter followers what they would do with a million dollars.
He got some interesting responses. Some were altruistic–donating the money or helping family members. Some were realistic–like paying off debt. And some were funny–like calculating the time it would take to count the money at the bank–in twenties.
It got me thinking. What could each of us do with a million dollars?
I’m overly rational so I got out the calculator. $1,000,000 invested should provide $40,000 of retirement income forever. With Social Security providing 40% of our needs (as it does for the average recipient), we should have a stream of income of about $67,000 in retirement. I could live a pretty nice life on $67,000.
That $1,000,000 invested in rental real estate should provide even more income. According to Paula at affordanything.com, we shouldn’t invest in a property unless it will rent for 12% of the purchase costs per year, 6% of that goes to costs and that leaves 6% return for us. Our retiree now has an annual stream of income of $100,000 including Social Security.
Now we’re talkin’! With that income, we could do some really cool altruistic stuff too!
But not everyone will need a million to retire comfortably–the lower your expenses, the less you will need.
A rule of thumb is that you need to have 25 times your annual expenses invested. This will allow you to spend 4% of your invested balance when you retire and then increase that spending amount for inflation each year. You’ll support yourself with that, plus social security and any pension (if you’re a lucky pension receiver!).
Now, it would be amazing if someone just handed us our $1,000,000 but that’s not very likely so what would it take to save our $1,000,000?
There’s a fabulous calculator on Bankrate.com that will help us figure that out. The defaults of 7% return and 2.9% interest are reasonable. I’m super conservative (aka chicken) with my projections and use 6% for investment earnings but 7% isn’t too aggressive even for me.
If a 30 year old starts with $10,000 invested and invests an additional $520 a month, they will reach $1,000,000 when they are 65.
Of course inflation makes that $1,000,000 worth less than it is today. You’d have to invest about $1,525 each month for your money to be worth $1,000,000 when you turn 65.
Seems impossible huh?! But I did it–and I did it long before age 65. So you can too!
I started earlier. By age 30, I had $35,600 invested. I had some home equity on top of this but that was rolled into future homes so I don’t count it.
I saved more. I couldn’t find my budget from age 30 but at 31, I was saving just over $1,000 each month including my employer’s retirement match.
Some of this savings was to buy my next car and save for vacations–I didn’t segregate my savings by goal. It may help to keep separate savings accounts for each of your goals.
And then I saved even more. As my salary grew, I let my expenses grow a bit but not nearly as much as my income. And I socked away the difference.
You’ll find it easier to save as you get older so long as you don’t allow your expenses to grow with your income.
You have to decide what is important to you and spend your limited resources on that–but not spend those limited resources on what is not important to you. You can afford anything but you cannot afford everything–visit Paula at affordanything.com for some great insights.
We own a boat, a stupid big custom home, and a vacation home. All paid for with cash.
But we used a VCR until two years ago, we don’t go out for expensive dinners, we don’t travel much (other than to the lake or vacation home) and I don’t have expensive clothing, jewelry, electronics etc.
Shopping is not among my hobbies. If shopping is your hobby, find a new hobby.
This also means you cannot finance your lifestyle with debt.
Debt keeps you enslaved. You are paying for your past instead of preparing for your future.
You will need to use debt–for your home and maybe for your education. But use that debt carefully–buy only what you need and work hard to pay it off quickly. Or if you prefer to keep that debt, work hard to build a sinking fund that would allow you to pay it off.
So start working on that million.
If you are starting late, start now.
If you aren’t able to save as much as you need, save what you can.
It will only get easier–I promise!