No matter how old you are, you should be developing a strategy for saving and investing for retirement. The more distant and far away it seems, the greater your opportunity; the single most vital factor in investing is time.
Still, investing can seem mysterious and nervewracking to many people, so you might not get the right kind of start or you might delay your start. The strategy I’m about to give you here is not a reprieve from investing, but it will make your investments go a whole lot further, taking some of the stress away and maybe helping you enjoy the journey a bit more along the way.
For an easy but somewhat more precise approach to figuring your nest egg (the amount you’ll need for retirement), Kitces suggests multiplying your estimated preretirement living expenses by 25.
-Jane Bennett Clark, What’s Your Retirement Number?
This is one of the easiest and most conventional formulas for calculating how much you need in retirement. Either calculate your annual expenses and multiply by 25, or use the “4% Rule” where you adjust your target retirement number until 4% of it is enough to live on. Mathematically these are the same thing (multiplying by 25 is the same as dividing by .04). So you need to save, invest, or otherwise accumulate $25 for every $1 you spend on an annual basis.
Maybe you see where this is going.
For every dollar you squeeze out of your budget, every frivolous expense that can be eliminated, you save your future self twenty-five times that amount. If you can stomach the notion that an $8 streaming service like Netflix and $30 internet package is a reasonable substitute for $60 of cable service and $20 of internet, you’ve saved yourself $500 a year.
“Yeah, so what, we’ve all heard crap like that before, Travis. Spend less, yadda yadda.”
Maybe so. But it’s a little more staggering when you think that your “measly” $500/yr saving translates into $12,500 that you no longer have to fret over accumulating for retirement.
This puts all those silly things like brewing your own coffee in the morning in a whole new light. $5 a day seems like nothing. $1,250 a year seems a little more substantial. But knocking $31,250 off your retirement account needs? That homemade coffee starts to taste a little better.
So far we’ve talked small (like $30k is small, right?), but now let’s go a little bigger. In my mind, automobiles are probably the biggest killer of retirement strategies for the average, middle-income person. Heck, it’s probably even worse for upper-middle class income earners who buy nice cars to pretend they’re wealthy, but that’s another topic for another day.
Let’s say instead of getting into the cycle of $250/month car payments, you decide to save up and pay cash for your cars. Sans payments, even moderate ones, you’re saving $3,000 per year, knocking $75,000 off of your retirement needs. And what does it cost you? Nothing. Absolutely nothing. You can still drive safe, efficient, attractive automobiles, albeit a few years older maybe, and shave tons off of your spending. And that’s not even considering the incidentals like taxes and insurance, never mind the fact that a $250/month payment doesn’t exactly get you in a brand new Benz.
And get this: money you’re not spending is money that can be invested or saved. It’s a double whammy. I could’ve titled this article “A Retirement Strategy 50x as Effective as Investing.” But 25x is shocking enough. I’m in the business of helping you out, not giving you heart attacks.
Investing is necessary, and it’s also rewarding. But investing can feel like it takes a long time to pay off. Paying down costly debt and being proactive about managing your costs has an immediate benefit, and you’ll start seeing an effect on your personal bottom line now, as well as being really, really effective at making your retirement ambitions and plans that much more palatable.