Do you know your retirement number, or the amount of money you’ll need to never work again?
Grant Sabatier, author of “Financial Freedom: A Proven Guide to All the Money You’ll Ever Need,” defines retirement as the point when you have enough money that you don’t have to work for money. He offers a formula to finding out that amount: Calculate your annual expenses, divide by the recommended retirement withdrawal rate of 4% (.04), and you’ll have the dollar number that you need for retirement. For example, assuming your annual expenses are $50,000:
$50,000/.04 = $1,250,000
Or if your cost of living is high, say you live in an expensive place like New York City, your annual expenses and therefore your “retirement number” would be higher:
$117,500/.04 = $2,937,500
Sabatier says that all the numbers that add up to your annual expenses and your “retirement number” can be tweaked along the way. He retired from his day job at 30, using specific, well-thought-out methods to manage that feat. He says retiring 5, 10, 20 years earlier than you’d expected is possible through a few mindful steps.
He says that people should first ask themselves the question, “what kind of life do I want to live, and how much money do I need to live that life?”
Save early and often
Increasing your savings rate will, of course, get you there sooner. “Even if you don’t make much money,” he says, “I encourage you to save 3% of your income,” and then next month try and save 4%. Increasing your rate from 3% to 15% by the end of a year won’t make you feel those slight increases, but you’ll literally cut years off the amount of time it will take you to retire.
Compounding is key
If you start saving at a younger age, the more your money will be compounding over a longer period of time.
“Because of compounding you actually need less money to retire at the age of 30 than you do at 65,” he says. For example, if you can save a large amount of money at the age of 30 it's going to grow 3,4,5 times based on the 7% investors get back historically on stock market returns, as opposed to saving a little bit of money and it growing 5% to 10% per year until you're 60.
Your net worth is your scorecard
Your net worth, Sabatier says, is your personal finance scorecard. Add up your assets, which is anything that you can sell for money, then subtract your liabilities, which is your debt. Then watch that number and make sure it’s growing. He says that the increase of your net worth will help you gauge how close you’re getting to retirement. It might even be more important than the amount you are saving.
The only budget you’ll ever need
Sabatier hates budgets, and he says that the little cutbacks like your lattes and avocado toast will not be what gets you to early retirement. Americans spend the most money on housing, transportation, and food, and Sabatier says if you can save in those areas, you’ll be better off than cutting out the smaller items that bring you daily joy.
Practice ‘money meditation’
“Every morning with my coffee, I open up my app, I look at my investments,” Sabatier says. He recommends you spend five minutes a day with your money as a “money meditation.” This way, money becomes something you’re familiar with, like a friend.