Sunday, August 21, 2016

Retirement Savings: Mission Accomplished?

There are so many ways to look at money, particularly at what is "enough". I've been thinking, reading, and writing about money for a long time now, but I always love coming across a new perspective that resonates with me, particularly when it comes with a pleasant surprise related to my own financial situation.

One example of this is the question how much do you need to save for retirement? Well, enough to retire on, obviously. We've calculated this out a couple different ways, and have a number in mind, which is about 10 times more than we currently have in retirement savings. It feels like it's so far out of reach. We're in our mid-thirties, and in the last ten years we've managed to put away a six-figure amount in retirement savings, but if we're trying to make to a seven-figure amount...sometimes it hardly seems possible.

Then Peanut stumbled upon this post from Mr. Money Mustache, The Man Who Didn't Realize He Was Already Rich. Basically, a guy in a pretty good situation feels like he'll never get to his savings goal but some math shows that, in fact, he has already saved enough to retire at age 65 - even if he never adds to his retirement account again! Therefore, he is only working to meet his current needs and/or save additional money in order to move up his retirement date. That seemed like a neat way to consider our financial position, and when Peanut did the math - woo hoo! - he found that we're already there.

To put it into more concrete terms, here are the numbers:

Retirement goal: $1,200,000
Current savings: $163,000
Compound Annual Growth Rate: 7%*
Yield in 30 years, with no additional savings: $1,240,797.57
Yield in 30 years, at our current savings rate: $2,279,866.22
Yield in 22 years, at our current savings rate: $1,261,218.61

WHAT THE WHAT. (Do the math for your own situation here.)

That means that, starting today, we could re-deploy our savings (currently around 10% of our income) in a bunch of different ways - we could move our planned retirement date earlier, we could start serious college savings funds for the kids, or we could up our standard of living. Or we could continue like normal and make big fancy retirement plans. Or we could choose to take lower-paying jobs that don't provide us with a lot of extra for savings since we really only need to cover our daily expenses for the next 30 years.

In reality, it probably won't cause any drastic changes to our lifestyle. Peanut and I are both fairly conservative, so we will save more than the minimum we need for retirement. We'll continue to take advantage of the tax benefits retirement accounts and HSAs offer. We might up our college fund savings rates, and we are definitely planning to cut our income (more on that soon!) with confidence. We'll build a bigger cash emergency fund than we've had the last couple of years. I'm not really one who's been super interested in early retirement - in a way, I've experienced that by staying home with kids for three years. And it turns out, I really like working! But man, the freedom that comes along with being able to take a job for the job instead of the paycheck - that's cool.


* Despite the fluctuations in the market the last 10 years, this is actually a conservative estimate looking at a period of 30 years or longer. See for yourself, here.