The Normal vs. Freeat33 Approach to Retirement Saving | Young ...

The following is a guest post from Derek and Mandy, husband and wife financial bloggers.? Derek blogs at www.freeat33.com and shares his personal and financial story to inspire others to surge past the status quo.? Mandy blogs at www.moneymastermom.com and is on a mission to help individuals to spend their cash, time and energy in line with their values.

How much do you need for retirement?

Looking at our family photo you might think I?m getting a little ahead of myself.? As the father of a young family, life is pretty busy.? Not to mention little emergencies are a common event in our home.? But the truth is that every adult should be thinking about retirement saving.? Retirement savings is like planting an Oak tree.? The best time to plant an oak tree was 50 years ago, the next best time is today.

The Norm of Retirement Savings

Retirement savings are a pretty popular topic.? Before the contributions deadline each winter we?re bombarded with professionals, peers, and sometimes family members preaching retirement savings strategies.? Despite this barrage of advice most individuals save nothing in their 20?s, a little in their 30?s, they start to save regularly in their 40s, and get serious about saving in their 50?s.

The Recommendations

Calculation #1 ? Good

MSN money chimed in this week offering benchmarks of appropriate savings.? When you?re 35 you should have 1 year of your salary saved, by 45 you should have 3X your salary saved.? At age 55 MSN money recommends you have 5X your annual salary in retirement savings, and at 67 you need 8X your salary.? At 67, with 8X your salary saved, ?MSN money says you can call it quits.? However if you want to ?ensure retirement happiness? you need 11X your salary.

We?ll disregard the suggestion that your level of retirement savings will dictate your level of happiness and focus on the theory presented.? The writer of this article makes a big assumption.? They assume your retirement spending directly correlates to how much you earned while working and that isn?t always the case.

In our home we have a high income and low expenditures.? I made $130,000 last year, but we keep our family expenditures to $31,200 or $600/week.? Alternatively there are families that are spending more than they make and surviving off credit.? For these families an appropriate retirement savings as a multiple of their income is not accurate for the opposite reason.?As a Young Cheap Living reader, you deserve better.

Calculation #2 ? Better

An alternate approach is to base this number on your spending. Recognizing that retirement savings should be set based on your expenditures, financial experts recommend the 4% rule.

What?s the 4% rule??The 4% rule means you can withdraw 4% of your nest egg every year and not run out of money for 25-30 years.? For instance if we used this rule and wanted to withdrawal $31,200 annually for our expenses we would require a nest egg of $31,200 / 0.04? = $780,000.? The 4% rule also accounts for 2% inflation.? So year 1 we would withdrawal $31200, and year 2 we could withdrawal $31,200*1.02 = $31824.?Some people find the 4% rule difficult and a new simpler rule is making its way to the forefront ? The new rule of $20.

What is the Rule of 20??For every $1 in retirement income, you need $20 saved.? If we want $31,200 in income, we need $624,000 saved.? For the mathematically astute readers out there at first glance it might look like they?ve eased the 4% rule up to a 5% rule, but Irshaad Russell of Investment Canada defends the rule of 20 because a lot of retirees have 2 phases of their retirement.? The first phase has some new hobbies and some new toys that require a similar income to when you were working.? In Phase 2, as retirees get older their spending slows down.? Most of us have that 80 year old grandparent that spends very little money, and there is pretty good odds that one day I?ll be there too.

What about Social Security?? (Admit it, you were just thinking this.)

Todd Tresidder at the Financial Mentor addresses this issue in his latest book, ?How much money do I need to retire???? Social security is an unfunded program.? That means that working individuals pay into the program, and the money is directly transferred to retirees.? There are fewer and fewer workers to support a growing number of retirees.? Less and less going in, and more and more coming out.? Given this reality Todd recommends treating social security as a potential bonus, but not a sure thing.? On a side note isn?t Bernie Madoff in jail because he took new investors cash and distributed it to old investors as returns.? Well? The courts said this was a Ponzi scheme and put him in jail.? Apparently you can?t do that unless you?re the government.?So how much should you save?

Calculation #3 ? The Freeat33 approach ( Because you?re worth it )

If you want a simpler approach some professionals recommend saving 10% of your gross income if you start saving in your 20?s, and 15-20% if you?re in your 30?s.? ?If like me, you are interested in Super Charging that retirement goal, try saving 50%+ and see how fast you can get it done.? Last year, my wife and I saved 78% of our net income.? At that rate the math says we could retire in 7-10 years.

The Proof is in the Numbers

If a household earns $80,000 after tax and lives on $30,000 they would be saving the remaining $50,000, which is 63% of their net pay.? If they invested the $50,000 every year for 13 years, and earned 4% after inflation, they would have $631,341 in their Freeat33 nest egg.? If they retired and began living off the next 4% they earned WITHOUT touching principal they would receive $33,253 that year.? More than they were previously living on.

If the numbers are not proof enough, then know that Mr. Money Mustache and Jacob at Early Retirement Extreme retired in their early thirties using this method.? Also at age 35, Todd Tresidder and Derek Foster retired doing the same.?The method is so simple it will put financial planners out of work.

It?s okay if you think inflation is what happened to your waste after marriage.? You don?t have to be an investment wiz.? Everyone knows how to save, even if you have refused to.? We all thank you for keeping the economy going, but it is time to start looking out for you.?Besides,?isn?t?this better than dreaming of winning the lottery?? At least you can work to improving the odds of seeing this happen.

Which calculation are you going to use when determining your retirement number?? How much are you currently saving of your net income?? Do you think you can improve it?

Source: http://www.youngcheapliving.com/2012/10/14/the-normal-vs-freeat33-approach-to-retirement-savings/

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