Joining the Club

I’m turning 50 this month and I’ve already received a membership offer from AARP. If I sign up today I get a “free sporty tote bag”. Uhmmmm… no thanks. However, I did start to wonder, do I have what it takes to join an association of retired people?

Let’s take a look.

AARP mailing

Price of Admission

Ask anyone you know – or ask yourself – how much money is needed to retire. Most folks have no idea but they’ll will take a stab at a number, usually in excess of $1 million. Now ask them what they need to save per month to get there. They’ll shuffle around and then probably begrudgingly say “more than I’m saving now”. Finally… ask them what they need to invest in to reach their goals – stocks, bonds, mutual funds, real estate, etc… Blank stares… This is a shame because the answer is not that difficult.

The Math

How much do you need to retire? You need around 25 times your annual expenses. If your current monthly budget is $5,000 that equates to $60,000 annually, meaning you’ll shoot for a goal of $1.5 million before you retire. This allows you a 4% withdrawal rate on your money per year in retirement – safe enough to ensure your money will outlast you.

If you are taking Social Security benefits, you can adjust your budget needs accordingly. If your total budget is $5,000/month and you’ll take in $2,500/month in SS then your target number becomes (2,500 * 12) * 25 or $750,000.

Personally I like to factor my scenario without Social Security and then I’ll consider it a bonus if it’s still around when I’m eligible. In my mind it’s not a sure thing or a done deal…

Monthly Savings

How much do you need to save per month to get there? Let’s say you’re 30 years old with nothing saved to date and you want to retire at 65 with that $1.5million. That gives you 35 years in a stock market that averages around 10% annual returns. Math says you have to save $500/month per month religiously for 35 years. How’s the new lease on the BMW looking now? It amazes me that people while prioritize a nice car today versus the ability to retire with dignity in the future.

To put this in perspective, a balance of $619,000 at age 60 would put you in the 90th percentile in terms of retirement account holdings. The average account balance is only $230,000 at that same age. You’re going to be in some high-flying company when you reach your goals!

Waypoints

What are some good target points along the way? Fidelity suggestions that by age 30 you should have 1x your gross annual salary saved for retirement. By age 40 you should have 3x and by age 50 you should have 6x, with a goal of having 10x your gross annual salary by retirement at age 67. This will allow you to adjust your savings rate to your spending rate, assuming of course you are living within your means. In these calculations Fidelity assumes you’ll retire at age 67 with Social Security benefits in place. It’s not a perfect formula but it gets you in the ballpark in terms of savings.

Another thing to look at along the way is your net worth, as calculated by The Millionaire Nextdoor. At any point you can take your age and multiply by your total pre-tax household income, then take the result and divide by 10. The result will give you your expected net worth. If your true net worth is below that number, figure out why. If you’re above that number, figure out how to make your number bigger. Again, it’s not a perfect formula but a good ballpark reality check.

Warning Signs

One warning sign – debt… get rid of it. If, by the age of 30 you’re in debt by more than 10% of your gross annual salary, that is a huge warning sign. You need to stop spending, and start saving. Today.

Another warning sign is a low rate of savings. That average today hovers around a meager 2.8% – a record low. Take a look at that $500/month number above. A 2.8% savings rate is the equivalent of a guy making over $200,000 saving around $500/month ($250 out of every paycheck) for his retirement. Pathetic. You should be saving 15-20% of your income toward retirement. More if you can. Build that nest egg up as quickly as possible! Retire early with no debt – what a concept!

How to Invest

What to invest in. I’ve covered this multiple times in my blog. You can keep it simple, real simple. Start with an S&P500 index fund like SWPPX. Get some money working for you up to the point you have $50,000 or so and then branch out into other sectors like small companies, international firms, and real estate. As you get more and more money saved you can get more and more diversified, but keep it simple to start.

Do not try to time the market. Your time horizon is long and dips in the market only work in your favor not to your detriment. The dips offer you the opportunity buy shares at lower prices. Invest at regular intervals (every paycheck) and start consistent no matter what market conditions you see.

I spoke with a friend the other day who has been sitting on a large sum of cash for over 3 years now waiting for the market to “dip” so he can buy in “cheap”. While sitting and cashing and waiting, he’s missed an average return of 12.25% over the past 3 years and a chance to turn every $1.00 in his account into $1.57. He’ll never be able to recover and make up that lost ground, no matter how long his timeline may be. That is a catastrophic blow to his retirement savings but he’s scared of “buying high” and watching the market correct. What does it matter with a 20-30 year timeframe? Remember, you only lose money if you sell…

Conclusion

Follow these steps will give you a pretty good chance of being able to retire by the time you get that AARP “Sporty Tote Bag” in the mail. That is, if you want to retire… Personally I do not know what I’d do if I retired today, other than go crazy in about 2 weeks. I am planning and looking at some options and ideas that will get me there in a few years. Until then, I’m holding off on sending that check to AARP just yet…

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