There are a lot of retirement calculators out there offering to calculate how much you’ll need in retirement. I don’t think too much about retirement, but I am saving about 15% of my take-home pay (10% pre-tax) in a Roth 401(k). I got to thinking how much additional money I would need to invest this year in order to retire one day early.
I’m making several assumptions. The first is that at the current rate, I would be saving enough to retire at age 65. Additionally, I’m assuming I would need $75,000 a year in retirement, which seems reasonable, if not high. Finally, I would earn 8% on my investments until I reached retirement. I do not account for inflation. Based on this, it seems that in order to take out $75,000 a year, I’d need about $205 a day.
That means that I would be able to retire a day early if I saved another $205 for my 65 year old self, right? Well, at age 22, I have 43 years ahead of me. So, by plugging that into to a time value of money calculator, assuming a rate of 8% earnings, I’d have to put away $7.50 today in order to retire one day early.
Not terrible, but what if I only needed $50,000 a year in retirement? It drops to just $5 (I’m not sure why it comes out to 1/1000th of my needed income, but that only for my 22 year old self. At ages 25, 30, etc, the numbers aren’t quite as predictable.)
So how much do you have to save to retire a day early?
I have 4 easy steps to help you find out how much extra you’ll need to save:
- In cell A1 enter: the amount you think you’ll spend each year in retirement
- In cell A2 enter: =A1/365 (the amount you will spend each day in retirement.)
- In cell A3 enter =65 – your current age
- In cell A4 enter: =A2/(1.08)^A3
In cell A4 will be the amount you’ll need to save today in order to retire one day early!
If you bring your lunch to work every day this year instead of going out to lunch…that $5 a day could mean you’ll be golfing one day earlier!
Consumerism Commentary gives us some bad news about Bank of America credit cards.
Jeff Rose explains why you should keep contributing to your 401k.
Flexo agrees that we should always try bargaining.
A guest post at Get Rich Slowly describes five steps to get to
make six figures in seven years.
Moneyning presents an interested discussion about how to handle splurging on loved ones.
Yesterday I released my 2009 goals, and today I’m focusing on a full year down the road. Still sort of short-term? Maybe, but I’m young and i have no idea where I’ll be at age 30. My one year goals actually are a year as of this past August. August is when I first started saving, and it will be interesting to see how far I can come in my first of year in the real world. So, the 2010 goals:
By August 15th:
- Increase emergency fund to $5,000
- Have a subsavings account of $6,000
- By December 31st:
- Save $5,000 in retirement (Roth 401(k) and Roth IRA combined)
Since I will have $3,000 in my savings account to start the year, this amounts to an extra $2,000 in savings. So my goal, ultimately, is to have $8,000 saved by the middle of August. That’s a little more than $1,000 a month. That seems like a lot and will likely leave me with only a little bit left over to invest, but at this point in my life, I am not sure that I would be willing to wait a year to avoid paying an extra 10% “penalty” that the short-term rate includes.
As promised, today I present my goals. I created two sets, one of very near term goals, for completion by the end of 2009, and another for a year from when I started working. I will post those tomorrow, so stay tuned!
Here are the 2009 goals..
By November 15th:
- Pay off the remaining $1052 in student loans, which carry a 6.8% interest rate.
By December 31st:
- Save $3,000 in my ING emergency fund (currently at $1,800).
- Have a $1,500 buffer in my checking account for monthly expenses (currently at $1,000).
- Start a Roth IRA with $1,000.
The goals will be extremely difficult to achieve. Based on my estimates of paychecks and my average expenses, I will still be almost $700 short. However, I have a few different ideas about how to make up the difference:
- By referring people to do business through work, I can earn $15 per referral. I would have to be vigilant in order to make a significant dent in that difference.
- Be vigilant about saving money. This doesn’t sound fun, but if I wanted to, I could cut down on costs for 2 1/2 months and save a few hundred dollars.
- Adjust my withholding. Since I started work in July, I believe I have been withholding too much. By adjusting this, I would be able to earn my money now instead of getting a refund in taxes.
- I could stop contributing to my company’s Roth 401(k) plan for a few paychecks. Since it will still be in a retirement account, I will simply take the amount of money scheduled to go into the Roth 401(k) and use that to start my Roth IRA.
Still, I’d rather avoid this and save more, so it will be a struggle, but I believe an attainable goal. Using these strategies, I believe I will be able to make up the difference. This comes down to the fundamental rule of personal finance. The goal is to make the gap (income – expenses) as big as you can. There are two ways to do this: by earning more and by spending less.
My plan takes into account both of these avenues for saving money. By referring friends, I will boost my income, and even 10 referrals each month will add up to over $350 (pre-tax). By limiting expenses, I may be able to save about $200, leaving me $200 short of my goal, and adjusting my withholding until January will likely help me get all the way there.
What are your thoughts, do you think I can acheive these goals without having to stop contributing to my Roth 401(k)?
