When it comes to retirement, I outline three levels of wealth. If these are new to you, I want to share my definitions so that you can start thinking about desires, goals and expectations for retirement.
The first is affectionately called “Rich Enough,” where your super basic expenses are covered (think brown-rice-and-beans diet) without any frills.
If you feel best maintaining your current lifestyle, complete with occasional splurges like dining out or buying some designer duds, great. It’s the “Pretty Rich” life for you. Being Pretty Rich in retirement allows you to live comfortably with some indulgences but doesn’t factor in a ton of future growth.
And, finally, we have the “Super Rich” level, which entails having more money than you can reasonably spend, a.k.a. baller status.
You may already have a sense of which lifestyle you want to shoot for, but the next step is to crunch the numbers to see how much you’d need to save in order to achieve this lifestyle. We need an exact number so that you know what you’re working toward on your own without feeling beholden to a job or another person to keep that flame alive. There is no one right number (although there are a couple wrong ones) for how you want to spend now or how you want to spend when you retire, or if you want to retire at all. The only wrong way to do this is to not think about it at all. Your plans can and will change but having a realistic idea of what you’re aiming for is the only way you’ll be able to figure out how to get there.
Your numbers may not look like exactly this, but here’s a pretty educated guesses, just so we can talk hard figures (or, if you want to find your exact spending plan, use my template here):
The median household income in the United States is about $63,000 before taxes. The average annual burn rate, that is, how much you spend per month and per year, is about half of that, or about $30,000. On average, we spend only about $5,000 a year on entertainment, personal care, and clothes (with the rest going to taxes, ugh).
Typically when I coach clients on calculating their goal retirement savings, I recommend that they anticipate spending twenty nonworking years in retirement. Other financial experts recommend budgeting for thirty nonworking years. Really, that’s a personal decision. How many years you plan on being in retirement depends on when you want to stop working and how long you think you’ll live. “Sheesh! Warn us before you bring up our mortality!” I get it—no one actually wants to crank up that Paula Cole’s song “I Don’t Want to Wait” and think about how much time they have left, but it is the elephant in the room—and here at the Money Minute, I don’t let the elephant in the room go unacknowledged. That elephant can grab a desk and join the rest of the class.
If we go off the average American needs, that’s twenty years x $35,000/year = $700,000 needed to live Rich Enough in retirement. Sure, that’s a lot of money, but it’s not in the millions like you may have started out thinking. Of course, there are many ways you can make $700,000 in cash or broken up as interest payments from your investments—and we will go over all of them in Second Period. But for now, keep this $700,000 number in mind so your imagination and reality are at least in the same book, if not the same page.
For the purposes of examples, here, I’m going to use $67,000 as the target annual spending in retirement, because it’s the average salary in the US. That means, you’ll need to have 1.3 million in your savings account for Pretty Rich-level retirement. By the way, researchers have found that earning $75,000 to $100,000 a year is the sweet spot for optimal happiness.
If you want to be Super Rich and your annual spending is clocking in at something like $100,000, then you will need to aim for around two million bucks to live out your days in the (Tuscan) sun.
What happens now?
Checking in on you: are you panicking? If so, it’s time for your pep talk: we’re on step one. We’re facing the music (er, well, numbers), which makes this the hardest step— and the most important.
The next question, of course is how do you get there? And, spoiler alert: your income isn’t going to be the entire source of funding your retirement accounts. And spoiler alert^2: your savings aren’t going to be your entire retirement pot either. Investing is going to be the best tool in your toolkit.
If you need a hand getting started, I’d recommend using Magnifi— an AI-powered investing assistant, designed to help you meet your financial goals. I’ll tell you how it works and how I use it to work toward my financial goals: on the app, there’s a chat feature you can hit up— think ChatGPT, or Siri, but, trained to answer your investing questions and registered with the SEC. So, you can ask Magnifi for help putting a retirement plan together based on your Rich Enough, Pretty Rich or Super Rich target number. From there, it looks like this (screenshot of my own Magnifi chat below)— it will ask you some q’s about how old you are, how much you have saved for retirement already, when you want to retire, and a few other things. It’s basically a mini version of a first meeting you would have with a wealth advisor or a financial planner.
From there, Magnifi helps with three things that are super important: 1) Magnifi crunches the numbers for you to determine how likely you are to reach your retirement goals, 2) If you are not on track to meet your financial goals for retirement, Magnifi will give you recommendations on how to boost your chances— like, retiring later, or contributing more aggressively to your retirement accounts. And 3) Create a custom recommended investing portfolio based on your goals. The reason these steps are so important is that, even though knowing what your retirement goals are is essential, knowledge can’t help you actualize your goals. But Magnifi can.
Meet your new money assistant here, do it for your future badass retired self.
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