Have you thought about how much income you need after retirement? If you have, chances are you tried one of these online retirement calculators such as the AARP’s retirement calculator. I used my old salary and it estimated that I would need at least $6,340,998 to retire at 40. (Mrs. RB40 retires at 60.)Unfortunately, I must confess that we haven’t reached that goal yet. Try it out and share your number for fun, it’s just a guesstimate anyway. *Update* It looks like the AARP calculator returns different graphs depending on your input. If it shows a monthly budget, then click on the ‘Continue to Options’ button to see the lump sum.
The problem with these retirement calculators is that they usually assume you need around 80% of your pre-retirement income. The 80% is derived from the reduction in job expense and the removal of retirement saving. The calculators assume that most people put 10-15% into saving and then spend the rest of their paycheck. This might be a good assumption for the average North American family, but it is not a valid assumption for us. Over the last few years, we have lived on Mrs. RB40’s paycheck and invested most of my income.
A better way to estimate how much you need in retirement is to look at your monthly expenses as you get closer to retirement. Over the last year, I kept careful record of our monthly cash flow and confirmed that our expense column was much lower than our income. After I left my job, we still had a positive cash flow as expected. Mrs. RB40 also continues to contribute to her 401(k) and she aims to hit the contribution limit every year.
Some of our expenses went down after I left my job. These are the expenses relating to holding down a regular job we touched on earlier.
- Childcare – This is the biggest expense reduction we got from my transition to become a stay at home dad. We were paying $1,250/month for full time daycare previously.
- Transportation – I drive about once a week now and fill up the tank about once a month. I didn’t drive all that much even when I was working so we saved less than $100/month here. I suppose we could sell the car to save even more money, but we are already just sharing one car. Perhaps if we really need to cut expense further, I would consider this.
- Clothing – I haven’t purchased any new clothes since last Christmas. I haven’t worn long pants this whole summer except when we went to FinCon in early September and I wanted to look somewhat professional. Shorts and t-shirts are my usual attire nowadays and I’m quite happy with that.
- Grooming – Sad to say that I’m saving on grooming. I shave about twice a week and I usually give myself a buzz cut now. It seems grooming goes out the window when you spend 99% of your time with a toddler.
- Discretionary spending – Part of not having a regular job is the reluctance to spend money. We still eat out once in a while, but I’m much more hesitant to spend money unnecessarily.
- Healthcare – We signed up with Mrs. RB40’s employer sponsored health insurance. This costs about $150 extra per month. We are very lucky that Mrs. RB40 likes her job and plans to continue to work in a traditional setting. Our healthcare cost could be much higher if we have to purchase a private health insurance.
All in all, we are doing fine so far even after leaving my job. As long as we maintain positive cash flow and invest the extra, we should be able to keep building our net worth. I have no doubt we will be better off 4 years from now. If you plan to retire early or to change careers, then save as much as you can now. If you can get used to saving 50% of your income, you will have many more options later on. Don’t be like the average family who spends all their income.
There is a great new website to help you manage your investments – Personal Capital. You can keep track of your income, expenses, and investments, all in one place. Personal Capital is geared for investors and have many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.
Follow up post: Read about my favorite retirement calculator: FIRECalc
photo credit: www.401kcalculator.org
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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