The old paradigm of working 30 – 40 years, saving 10 – 15% of your income to then retire at 65 or 67 has been blown to smithereens by the ever-growing FIRE (Financial Independence, Retire Early) community. The FIRE community has proven that the old paradigm is completely optional. You can retire in 10 years if you really want to and really hustle.
Unfortunately, many financial planners are still stuck in the past and don’t have the wider vision necessary to address millennials with their much different working style and their strong sense that values are more important than money.
As someone who lived through the heady days of NYC in the 1980’s when the motto was “Greed is good!,” I’m greatly relieved that this generation is now paving the way for a healthier future on so many fronts. Hooray for that! Now, before we go on, there is nothing, absolutely nothing wrong with working for 40 years, saving 10% consistently and then retiring–if that’s what you want to do and that is what you enjoy. However, nothing could be more dreadful than working for decades in a job you don’t like or enjoy that has long since lost any challenge so that you can retire and then start really enjoying life.
The recent shock of the Coronavirus has been a wake-up call for many. You may not be lucky enough to get the chance to retire. The solution is to start living your ideal life now. Don’t wait for some day in the future. Amazingly, by taking small actions to create your ideal life now, you’ll speed up the process. The law of attraction, like attracts like, works. The more you do the thing you love to do, the more likely you are to attract it. Action is required. You must take action to move closer to the ideal life you desire. The good news is that those action steps can be very tiny. It doesn’t have to be hard or big or scary. It can be easy, fun and simple! In fact, you’ll be much more likely to succeed if your actions are easy, fun and simple.
Most financial advisors will come up with a massive sum that you need to accumulate before you can retire. This is not their fault; it is just how it has always been done in the past. Their calculations are based on a huge number of assumptions that, if anyone were honest, are impossible to answer accurately. For example, when will you die and when will your spouse die? We can take a guess based on longevity calculators, but we really can’t answer that.
And here is the real kicker of a question: What will the rate of inflation be throughout your retirement?
No one can answer this question because no one has a truly functional crystal ball. So an average of 3% is usually the default, despite the fact that in the not too distant past (the 1970s), inflation sky-rocketed. What if that happens during your retirement? It could destroy the most meticulously calculated plans. And, to really provide an accurate plan, you need to know how much you’ll spend for the rest of your life, including vacations, insurance, groceries, taxes and unexpected medical expenses and repairs to cars, roofs, etc.
So as you can see, seemingly rock solid retirement plans are based on quite a few assumptions and you really have no way of knowing if those assumptions are correct in advance.
This makes retirement planning quite challenging, to say the least. How can you ensure you’ll not run out of money given so many unknowns? You can stress test worst case scenarios. Run your numbers with a plan to live to 100. Try your numbers with 5% inflation. Run your numbers with low returns. You can do this for free on any number of retirement calculators online. I happen to like Todd Tressidder’s Ultimate Retirement Calculator at financialmentor.com. Play around with different figures and watch what happens. I found it an eye-opening experience.
Finally, most financial planners assume that you’ll not be working at all and will be living on your accumulated assets (usually a collection of stocks and bonds). But did you know that by earning $1000 a month, you need $300,000 less in your retirement savings? Equally, for every $1,000 less a month you spend, would also reduce the amount you need in retirement savings by a whopping $300,000.
This is called the Rule of 300: for every $1000 that you spend, you need $300,000 in investment portfolio that earns 7% returns on average. Once people understand the Rule of 300, they usually get motivated to do two things –find a way to cut $1,000 a month from their expenses and find a fun way to generate an extra $1,000 a month in income—the side gig or lifestyle hobby business that is aligned with their passions. Do both and you’ll shave a massive $600,000 off the total you’d need to retire just like that! Both of these actions are usually much easier and faster to do than working and saving to accumulate that $600,000.
Given that Vanguard’s research reveals that the average retirement savings is only $190,505 by age 55-64, I’d say most people would be wise to start looking at both reducing expenses and starting that side hustle right away. If you think $190K sounds like a lot of money, take note. At a 4% safe withdrawal rate, you could withdraw only $7,600 a year, adjusted annually for inflation. I suspect most people will need more than that to live comfortably and are relying on Social Security and/or some pension income to boost their retirement income. Don’t wait. Start now and you’ll shave years off your financial freedom date!
Learn more in the FIRE (Financial Independence, Retire Early) Course.