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Retirement Planning For Dummies. Matthew Krantz
Читать онлайн.Название Retirement Planning For Dummies
Год выпуска 0
isbn 9781119627623
Автор произведения Matthew Krantz
Жанр Личные финансы
Издательство John Wiley & Sons Limited
BLS Table 1300. Annual expenditure means, shares, standard errors, and coefficients of variation, Consumer Expenditure Survey, 3rd quarter 2017 through 2nd quarter 2018 (www.bls.gov/cex/22018/midyear/age.pdf).
Seeing how spending changes as you age
You might be wondering, “What does the spending of a typical American have to do with my retirement plan?” After all, if you’re like most people, you’ll work until you’re at least 65, and you assume that your spending habits will be different then.
Won't your need for money decrease over time? Let's fast-forward to your future and see how income and spending changes for households aged 65 or older. Check out the numbers in the “66-Year-Old” column in Table 2-2.
So, how does life look different in retirement for most people? Here’s what happens to income and spending for a 66-year-old:
Income falls dramatically (more dramatically than it looks at first). The drop of after-tax income to $45,463 is more jarring than it seems. Keep in mind that average after-tax earnings peak at $86,635 when workers are aged 45 to 54. Seeing income fall to about half that is an adjustment.
The mix of income sources changes. Wages and salaries for people aged 65 and older drops to $17,129 a year. That’s down from $59,555 for all households. Meanwhile, Social Security and retirement savings pick up some — but not all — of the slack. People aged 65 and older bring in $25,425 a year from these retirement plans.
The 80 percent rule is good (and conservative). It turns out that our typical 65-plus-year-old’s spending totals 66 percent of the typical American’s pre-tax income. Remember, the average household brought in $76,335 in pre-tax income. If you plan on spending 80 percent of your income in retirement, you’ll be okay in most cases.
Housing costs fall (but not as much as you might think). Annual shelter costs still account for $16,723, or 18 percent of spending for the 65-plus set. You might expect this to be lower because most people at this age have paid off their mortgage. However, although 80 percent of those 65 and older are homeowners, 30 percent are still paying a mortgage. And 19 percent are paying rent. In other words, 49 percent of people at this age are either renting or paying a mortgage.
Expenses do fall, but not by a huge amount. Total spending of the older set falls 17 percent to $50,178. Lower spending on some things, such as food and apparel, cuts spending even as healthcare expenses rise. Entertainment costs tend to be flat.
THE FIRE MOVEMENT CAN HELP
Early retirement used to mean calling it quits when you turn 60. But a rising group of people are hoping to hang up their apron much earlier, at 40 or even younger. What’s this heresy? It’s called FIRE, or financial independence retire early.
I talk about the FIRE movement several times in this book. The strategy has plenty of holes, but these people are onto something. FIRE advocates throw away the goal of retirement as a time to do no work, and take control of their financial lives as quickly as they can so that they can do what they enjoy now.
Some of the assumptions used in FIRE planning are questionable, but one aspect that makes a lot of sense is spending control. Some FIRE leaders who left the workforce early did so because they had large incomes. Others did it by following the guidance in this chapter but at a higher level. Simply stated, they maximized savings rates to shorten the time needed before being financially independent.
Advocates of FIRE meticulously track where every penny is going. Their goal is to save 70 percent or so of take-home pay, so that they have saved and invested 25 times their annual run rate. If their run rate were $80,000 a year, the FIRE crew would aim to sock away $2 million. That way, they say, they could safely withdraw 4 percent of their portfolio (following the 4 percent rule), or $80,000, a year.
I dig further into the FIRE movement and the 4 percent rule later in the book. But we can all learn from the FIRE philosophy. Two blogs explain FIRE well. Mr. Money Mustache (www.mrmoneymustache.com) pretty much kicked off the FIRE movement with his story of spending 50 percent less than most people. Doing so allowed him to retire at 30. Mr. Money Mustache doesn’t disclose how much he earned. But a 2016 New Yorker article shares some income figures (www.newyorker.com/magazine/2016/02/29/mr-money-mustache-the-frugal-guru). Armed with a computer-engineering degree, he earned $41,000 a year in 1997. He then moved to another tech company in 1999, at age 24, and made $75,000. Mr. Money Mustache retired in late 2005 with a $600,000 portfolio and a paid-off house.
The blogger Financial Samurai (www.financialsamurai.com) also saved half his after-tax income and retired at 34. He gives lots of financial details on how he did it, but his high income while he was working certainly helped.
Even if you love your job and plan to work forever, the FIRE movement brings a precision to savings that’s worth listening to.
Improving Your Numbers
Now that you’ve quantified your spending and compared it to the average, you know where you stand. If you’re happy where you’re at, great! If not, read this section for helpful ways to increase your income and get spending under control.