Tuesday, February 27, 2018

How Much Money Do You Need?

How much money do you need to retire? To live the life of your dreams? No really. Like give me an actual number of dollars.

I'm guessing the majority of people haven't really thought about this. It is just an estimate of course, one that has to be a bit fuzzy. But many people's initial estimate will be way over or way under their revised estimate once they've taken the time to write down a few things they want in life (a 2 bedroom house in California, a BMW M5, take a 2 week vacation to a different country twice a year, etc). A lifestyle like that will probably be around $2 million, but not $10 million or $100 million. Those are very significantly different numbers. Most people who haven't thought about it probably aren't within $1 million of their desired lifestyle. This is a huge problem.

The reason that this is a huge problem is that the amount of money you need drastically changes your lifestyle. If you don't desire an expensive lifestyle and can manage off of 25k per year you can safely (remind me to do another post about this assumption and its risks) retire when you hit 625k. Many families spend maybe 40k a year, which means they can retire and live off investments at the  $1 million mark. On the other hand if you truly do need a lifestyle that requires $10 million dollars then you are not going to get there working even a cushy software engineer job making $100k+/year. Your strategy must be completely different.

Thus if you haven't already, take the time to write down your expected lifestyle and calculate how much that might cost you a year. Go ahead and add in some buffer. Obviously its an estimate and subject to change, however its usually pretty close to the real number because people tend to not change their lifestyle and spending habits significantly.

Its possible too that if you put down something like "I want to ride a motorcycle across SouthEast Asia for a month", your research might tell you that it is significantly cheaper than you originally thought.

Its just a first step but a really important one. You'll be able to understand your life (and financial) goals and tell roughly if you are on track.