“Retirement: It’s nice to get out of the rat race, but you have to learn to get along with less cheese.”
How Much Money Do You Need to Retire?
Like most people, I began to think about retiring at about the same time as I started a family. I was relatively young — 29 at the time — and my expenses were increasing quickly. However, my income was increasing slowly, which is typical of most salaried jobs.
I knew that if I worked my way up the corporate ladder, I’d eventually be able to own my own house and give my children what they needed: food, clothing, an education, and some little comforts.
I also knew that I would not be able to afford to send them to private schools, pay for horseback riding and tennis lessons, or take them on exotic vacations. That didn’t matter so much. I didn’t have those things when I was growing up, and I didn’t miss them.
But what I couldn’t adjust to was the realization that I would probably never be able to stop working. Even back then, in the mid 1980s, when the entire country believed retirement was a national entitlement, a little arithmetic proved to me that it was not going to happen.
I could have induced myself to be happy with the idea of working till I keeled over. But I didn’t want to. I wanted to be able to retire. And not in 40 years. I wanted to retire sooner than that. Much sooner.
So at the tender age of 29, I set a goal: to make enough money to buy a house and two cars and have a nice wad of cash sitting in the bank… as soon as possible.
In Automatic Wealth, I explained how I achieved that goal. By getting serious about my income, I was able to pay off a mortgage on a $175,000 house, buy two decent cars for cash, and have something like $100,000 in my bank account.
I did it in about three years, if memory serves. And you might think that made me happy. It didn’t. I felt anxious. Worried. I didn’t feel rich, and I certainly didn’t feel like I could retire.
That house I had worked so hard to own seemed suddenly too small. Our Hondas seemed too dull. And it was clear that a nest egg of $100,000 wasn’t going to be enough to pay for college for our three kids, not to mention my retirement.
“Okay,” I thought. “I simply underestimated how much I need to retire.”
So I set a new, much more ambitious, goal. I would swap my starter home for a fancy one in an upscale neighborhood, my starter cars for luxury vehicles, and boost my retirement savings to a cool million dollars.
Three or four years later, I hit my marks. We were living in a spacious $600,000 home in a “gated” community. We owned two Lexus sedans. And I had more than a million socked away.
I had the goodies to prove I had “made it,” and enough in the way of “liquid” assets to take care of the future. I should have been thrilled. I wasn’t.
For one thing, I had bigger bills to pay. I had no mortgage, but my property taxes at $12,000 a year were equal to the mortgage payments on my first house. My kids were going to private schools — another $12,000 a year. And everything we were buying — from furniture to vacations — was more costly than what we used to buy.
So there I was, a millionaire but still worried about money. And to make matters worse, my house seemed suddenly too far from the beach and my luxury cars too commonplace.
So I upped the ante again. This time, I was going to really do it. A multimillion-dollar house, super-expensive cars, and at least $10 million in savings and investments before I reached my 39th birthday.
Once again, I hit my goal.
And so I retired. I stopped working and started living off my interest and investment income. I spent 18 months doing something I loved — writing short stories.
Some of them got published!
I won three literary prizes!
And I earned a total of $900.
Meanwhile, my property taxes ballooned to $100,000 a year and upkeep on the house was another $30,000. Our $60,000 cars were very ordinary in our new neighborhood. To impress my neighbors, I ‘d have to spend much more on everything — clothing, furniture, etc., etc. That meant I had to go back to work.
I am sure this sounds disgustingly self-indulgent to you. It was. That’s my point.
I finally recognized that something was seriously wrong. And it wasn’t with the world. It was with me.
The secret to feeling “rich” enough to retire happily, I realized, was not just to have enough money to live comfortably. More important, it was learning to be satisfied with what you have. In other words, the trick to financial independence was to be content with some reasonable level of wealth.
It wasn’t easy for me, but I forced myself to stop ratcheting up my desires. I decided I was going to be happy with what I had. And the amazing thing was that the moment I decided that, I was!
I know now that I could have been happily rich years and years ago. All I needed to do was be happy with the things I had and with what I could afford to pay for out of the money I had put aside. That way I could enjoy my life without worrying about working. In other words, I could retire.
So that is the most important thing about the retirement game: training yourself to be happy with a reasonable level of wealth.
But that raises the question: What is a reasonable level of wealth?
I answered that question in Automatic Wealth — but I made it unnecessarily complicated. I suspect lots of folks who read it thought, “This sounds good, but there’s no way I’m going to do all that.”
Since then, I’ve simplified my answer. My current thinking is that your primary financial goal should be to (1) own your house outright, (2) have no debt, and (3) have sufficient savings to pay for your expenses.
The main factor in this equation is the house. Because the cost of your house is what determines most of your other expenses. Not only, the cost of your taxes and upkeep and so on, but also, as I suggested above, the cost of the cars you are likely to buy, the amount of money you will spend on leisure-time activities and “things,” and so on.
Here’s a good rule of thumb: It will cost you about 40% of the price of your house every year to live the lifestyle that goes with your house.
In other words, it will cost you about $80,000 in annual, after-tax income to “own” a debt-free $200,000-home lifestyle.
How much do you need in savings to create $80,000 of after-tax income?
That depends on how much you earn on your investments. If you put all your money into tax-free municipal bonds, for example, you’d need about $2.8 million to get that kind of income.
If you put your money in stocks and managed to earn 10% on it, you’d need about $1.6 million. (Your gains would be taxed at about 50% — by the Feds and your state.)
Either way, that’s a lot of dough, no?
So the smartest thing you can do is to find a way to be happy with a house that is relatively inexpensive. A $400,000 house is much better than a $4 million house. And a $200,000 house is twice as good as a house that costs you $400,000.
Pick a price level — the lowest price level that you can really enjoy. And stick with that. Don’t give in to the temptation to “trade up” just because you can afford to.
By the way, the “advantages” of trading up are illusionary. The first house I owned was every bit as good as the house I have now, which cost 25 times as much.
I’m not kidding. That first house had the potential to provide me and my family with all the benefits my more expensive houses have ever given us. It had adequate space. Everyone had a bedroom. It had a nice kitchen and family room. It had a swimming pool. It even had an automatic garage door. What more could one ask for?
And had we stayed in that house, we would have received some important benefits that are only apparent to me now. For one thing, we would have been able to develop long-term relationships with some really good neighbors. Plus, by living in the same neighborhood for years and years, our kids would have had the opportunity to make lifelong friends.
That said, let’s get back to your plans for a comfortable retirement…
Once you have an affordable house that makes you happy, getting completely out of debt is the next big thing. That means paying off the house as quickly as you can, as well as anything else you may have borrowed money for.
The rest of the program is to get that retirement account funded.
How much will you need in your retirement account? I’ve already given you a way to figure it out…
- Take the cost of the house you can be happy to retire in.
- Multiply that by 40% to get what it will cost you, in after-tax income, to live.
- Given a reasonable rate of return on your investments, you can now determine how much of a nest egg you will have to have in order to generate the amount of annual, after-tax income you will need.
Once you’ve done that, you will realize what I did when I first ran the numbers 30 years ago: With a normal income, you will never earn enough money to put that much aside.
I have made this point in every book I have written about wealth building. But none of the politically correct, bestselling authors want you to believe this. They have made their millions by convincing their readers that they can retire simply by scrimping and saving. That simply isn’t true. In fact, it’s a big, fat lie.
If you want to retire while you’re still young enough to enjoy it, hear this: You must create an extraordinary income for yourself.
There are only two ways to create an extraordinary income: as an entrepreneur or as an intrapreneur.
I have written extensively on both of these subjects, so I won’t get into them here. Suffice it to say that of the several dozen people I know who can afford to retire, about two-thirds of them are entrepreneurs and one-third are intrapreneurs. I know nobody rich enough to retire who has earned his money by being an ordinary employee.
So that’s the formula:
- Buy the most affordable house that will make you happy.
- Pay off your mortgage — and any other debts you may have — as fast as you can (and don’t acquire any new debts).
- Get yourself on a trajectory to enjoy an extraordinary income through entrepreneurship or intrapreneurship — and start socking money away.
This is a great time to get started. Here’s why:
- House prices are very low — as low as they’ve been in more than 20 years.
- Mortgage loans are very inexpensive.
- Although much of the world is in financial peril, some businesses (such as information publishing) are growing in leaps and bounds. Now is the time to get in — either by creating a side business or by becoming an invaluable employee of a business someone else owns.
Get started now, and you will be able to retire in 5 to 15 years.
You may not want to retire yet. You may be having so much fun that you’ll decide to keep working. But it will be your choice. And that’s the idea, isn’t it? To have that choice?[Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]