If you're new here, this blog will give you the tools to become financially independent in 5 years on a median salary. The wiki page gives a good summary of the principles of the strategy. The key to success is to run your personal finances much like a business, thinking about assets and inventory and focusing on efficiency and value for money. Not just any business but a business that's flexible, agile, and adaptable. Conversely most consumers run their personal finances like an inflexible money-losing anti-business always in danger of losing their jobs.
Here's almost a thousand online journals from people, who are following the ERE strategy tailored to their particular situation (age, children, location, education, goals, ...). Increasing their savings from the usual 5-15% of their income to tens of thousands of dollars each year or typically 40-80% of their income, many accumulate six-figure net-worths within a few years.
Since everybody's situation is different (age, education, location, children, goals, ...) I suggest only spending a brief moment on this blog, which can be thought of as my personal journal, before looking for the crowd's wisdom for your particular situation in the forum journals.
People keep telling me that I need at least $1,000,000 to retire comfortably. This concerns me somewhat since I don’t have one million and because it would take about 10 more years to save for one. Now, one million would throw off a cost of living adjusted $40,000 a year in capital income if it is set up as a perpetuity (you never lose principal) and even more if set up as an annuity. For instance, assuming 8% over 60 years will result in $74,812 per year. This income will result in an effective post-credit post-deduction tax rate of 10-15%, so let’s go with the higher one. Now I have $34,000 left but at least I can sleep well knowing that my money is spent in the diligent and productive manner that is becoming of the government, ha!
Now what to spend that $34000 on. First things first.
Housing. In the midwest I can rent a new 3 bedroom house for about a grand a month. Now, I don’t really want to spend time taking care of such a big house. I mean, if wandering around from room to room was entertaining to me, I might, but still. The house would just feel big and empty. Moving to the coast instead, the rent would go up to $1200/month for a nice two bedroom apartment. That’s just perfect although I admit a 1 bedroom house would be neater and easier to maintain again given that housekeeping is not a hobby of mine.
Alright, so $1200 times 12 is 14400, and that’s half the money gone.
I now have $19600 left to spend.
Food comes down to about $100 per month. I prefer home cooked healthy food which is generally not expensive. That’s $1200/year leaving $18400.
If I’m retired I probably won’t be spending too much time driving around. If I wanted to drive somewhere, I’d probably rent a car or go by air. Nevertheless I do like fancy road bikes, so that would be an easy $400 to deprecate and maintain a speedy $2000 carbon bike. This leaves $18000.
I would like to keep playing hockey when I’m retired. Hockey is an expensive sport. There are rink fees plus wear and tear on equipment. This could easily cost me a good $500 a year in fees and equipment. On the other hand, it’s the most fun that can be had while wearing full body padding, so I would really like to keep playing. Down to $17500.
I like CDs and books. I typically get them used anyway and don’t really see any reason to get new ones. Sadly there’s an upper limit to how much I can read, so maybe $500 a year, tops. That leaves $17000.
Almost forgot health insurance. Let’s say $100 a month for a high deductible plan to be on the conservative side. I now have $15800 left.
Let’s splurge and say $800 per year on clothes and misc. I’m not sure I could spend that much, but I could try. That leaves $15000.
Hmmmm ….
What should I spend the excess money on?
Maybe full subscription cable, a basic human need! That ought to be worth $5000 a year if we include subscription costs, TiVo, and a 50″ plasma screen that needs to be upgraded every other year.
I don’t like phones and I don’t like cell phones in particular, but I guess I could get an iPhone with the mandatory AT&T enrollment. This phone would allow me to make phone calls by tapping a screen rather than a keypad and allow me to listen to the maybe 2 daily voice mails I get in ANY order I want. I think that’s another $2000 in phone and subscription fees.
The good news now is that I still have $8000 left to spend. The bad news is that I still have $8000 left to spend.
I guess I could buy a Jaguar on credit to demonstrate how I appreciate “emotional engineering” and “daring visions”. This will allow me to drive around in a car that is “far greater than the sum of its extraordinary parts”. I think I deserve one. Getting an easy loan would probably set me back $7500 leaving $500.
It only seems natural that if you have a fancy sports car that can go from 0 to 100 in 4 seconds that you should drive it two blocks down to 7-11 to pick up caffeine at least once a day. This will easily cost me $500 a year leaving me $0.
Problem solved! 🙂
I think the perceived need to retire with large amounts of money comes from the desire to spend retirement as a part of the rich consumer class a.k.a. the upper middle class. However, with more modest consumption goals, I don’t think a million dollars is a requirement for retirement.
Originally posted 2008-01-07 06:53:20.
