Just think about what having a few million in your retirement account can do for you, and there is no doubt in my mind that anyone can retire a millionaire. Retiring with that much money definitely relieves you from the stress of wondering if you have enough to retire comfortably. Imagine traveling the world with no worries whatsoever. To retire with a few million dollars is a dream come true for many Americans. And contrary to popular belief its extremely easy to get that million and it’s getting easier every year.
This is a long read so take your time and really take this step by step. If you need to, keep coming back to this post (it’s not going anywhere).
Step 1. What Do You Want? Is It Attainable?
Just like any goal, the clearer it is to you the easier it is to accomplish.
- 83% of Americans don’t have clearly defined goals
- 14% of Americans have goals but they aren’t written down
- Only 3% of Americans have goals committed in writing
So, to make your retirement clearer you should know when you want to retire. You should also know exactly how much money you’ll need to retire. For you to just complete these two simple steps puts you ahead of 90% of Americans.
What Age Do You Want to Retire?
There is no required age to retire. Your situation is your situation. But, the typical age for retirement is 67 years old. The reason being, it’s the time you’ll start collecting social security and there are no fees for withdrawing money from your 401(k). It was also
However, it is typical for very talented men and women to choose not to retire at all. Warren Buffet, a multibillionaire, is 87 years old and still goes to work every weekday. Ray Dalio, another multibillionaire, is 68 years old and still has no plan on retiring. Many of the best people in their field refuse to retire because they love what they do every single day and retiring to them would be too boring. So, find out at what age you want to retire, and from there just do the math.
Step 2. Do the Math
To accomplish any goal it is very important for you to do the math. Doing the math gives you a blueprint for success. It shows you the road and keeps you on track. Now that you know what age you want to retire let’s find out how much it will take for you to accomplish financial security, financial independence, and financial freedom. These three financial positions were made by Tony Robbins to make it easier and clearer for people to retire.
Doing the math is simple. First, we need to know how much you need to retire. This is the best retirement calculator I could find on the internet. Input your information and what your expenses will be when you retire. And you’ll have your number.
- Note: Be honest and somewhat over-exaggerating when inserting your expenses. Its better to have more money than you need than not enough money when you need it.
Now we need to know how much you need to save every year to get to that amount. Use this calculator and click on PMT in order to solve for your payment. Input the same information you inputed for the other calculator and it will tell you how much you need to invest every year in order to reach your goal. Insert 8% for the interest
Achieving financial security takes a lot less money than you’d think. Financial security means that you have enough income from investments to pay for basic necessities. Such as housing, cars, food, and basic entertainment. Just having the income from your investments pay for these basic needs can help in a drastic way. To calculate this, you’ll need to input the monthly expenses for these basic needs. As an example, I’ll take the average American expense for these categories.
You can try this on your own and enter the correct amount for you
- Mortgage/Rent: $1,413
- Food: $350
- Utilities: $215
- Transportation: $280
- Basic Insurance: $500
- Total: $2,758 monthly or $33,096 a year
The average American will need to make $33,096 a year from their investments to pay for your basic needs. To calculate how much you will need in total we need to enter some numbers in a compounding interest calculator. S&P 500 has had an average return over the last 90 years, according to Investopedia, has been 9.8%. The median household income in America is $56,516 and let’s say they can save $5,000 a year and that they already have $5,000 already saved.
- Current Principle: What you already have invested
- Annual Addition: What plan on adding annually
- Years to Grow: Years till Retirement
- Intrest Rate: 8%
This means that they will need $337,714 to make this amount every year on average. In ONLY 20 years they will have $339,821. For only $5,000 a year they can have every basic need paid for without working a single day. What this means is that if you are 40 years old there is still time and if your past 40 its time to step your game up and it’s going to cost you a little more than $5,000 a year.
Having financial independence means everything is covered. Just the income from your investments now covers every expense that you currently have.
- ½ Clothing: $75
- Half of Dining & Entertainment: $150
- ½ Small Luxury: $100
- Total: $35,992
They will need $377,551 which is so easy to obtain since they’ve already been investing for financial security. If they can wait 1 YEAR, while not changing anything they will have $378,615. In 21 years they will have achieved financial independence.
Let us try to figure out how fast they can achieve financial independence if they maxed out their 401(k) with an $18,000 contribution every year. Let’s say it’s only getting them 7.5% on average. It would ONLY TAKE THEM 12.5 YEARS to have $379,127.
Financial Freedom covers everything and as Tony Robbins states, “everything you can think of.” Achieving financial freedom through your investments can change the way you live completely. This means now all of your bills are paid for, your vacations are paid for, and you still have enough to help others. Financial freedom is what we are aiming for when we think of retiring. To your surprise, this is going to require a lot less than you think.
- Boat: $1,000 monthly
- Porsche: $700 monthly
- Vacations: $20,000 yearly
- Financial Independence: $35,992
- Total: $76,392
If they could have all of their expenses paid for plus a boat, a Porsche, and two vacation trips a year do you think they’d turn that down? No. How much it cost them and how long will they have to wait to achieve financial freedom? If you already have $5,000 and invest $5,000 yearly at 9.8% you will need to invest for 28 years to have $779,510. If you invested $18,000 yearly at 7.5% you will need to invest for 19.5 years! You need to invest for ONLY 19 years to retire and have EVERYTHING and EVERYTHING YOU CAN THINK OF paid for!
Step 3. Make Your Savings Automatic
Now that you know what you need to obtain financial security, financial independence, and financial freedom the best thing to do is make your savings automatic. Just like my post about creating a budget the best way to stick to a financial plan and have it do the transfers for you. You should know how much your able to save every month and start putting that to your retirement.
Read More: How to Make a Budget That Works!
If your employer matches your contributions to your 401(k) it’s easy to make those contributions automatic. Your finance or your human resources department should be able to help you set-up an automatic payment which takes money out of your check and deposits it into the 401(k). If your company doesn’t match dollar for dollar you’re going to want to try to max out whatever they match and try to get a Roth IRA.
A Roth IRA is set-up through a brokerage like TD Ameritrade or E*TRADE. The max contributions that you can make to a Roth IRA are $5,500 a year so you’re going to want another retirement account. If your company does any kind of matching max that out first, then max out the Roth IRA account and then go back to your 401(k) if you can. You can set up automatic transfers through the 1st and 15th with any brokerage.
The Best Funds to Invest In
If you are anything like the average American, you know little to nothing about investing. So, to keep it simple I’ll give you my 2 best and easy funds/ETFs that can get you around 9.5% on average every year.
- Vanguard Total Stock Market ETF (VTI)
- Expense Ratio: 0.04%
- 1 Year Performance: 12.37%
- Vanguard S&P 500 ETF (VOO)
- Expense Ratio: 0.05%
- 1 Year Performance: 12.12%
When looking through your 401(k) or if you are just starting one DO NOT use a mutual fund or go for high-risk investments. These charge high fees and an over a long period of time typically lose money. If you stay with a Vanguard fund that charges 0.0005 on every dollar made and can keep up with the S&P 500 or the total stock market you cant go wrong. Remember you’re not trying to get rich quick you’re trying to get rich for sure.
Learn More About ETFs and Stocks: Investing In Stocks For Beginners
Retiring is a lot easier than everyone is making it out to be. However, every day that you wait is making it that much harder for you to reach financial freedom. Get to it as soon as possible! Read that book. The quality of your retirement is up to you.