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Money April 2018

Do You Need Two Million Dollars to Retire?

By Billy and Akaisha Kaderli

There are four categories of highest spending in any household. While financial experts will have you tap dance all over the place with investment products, it doesn’t really have to be that complicated. But it's very important to pay attention to these four categories.

Articles on retirement from the perspective of financial experts often proclaim that you must save enough in your investments to throw off 80% of your current annual salary. Many of them will say that you need $2 million in investments.

Approximately 10% of the households in the U.S. have a net worth of one million dollars or more. Expecting the regular "Joe" to meet this $2 million mark is not realistic.

The secret: Living within your means.

The Society of Actuaries (SOA) recently conducted 62 in-depth interviews of retired individuals across both the U.S. and Canada. These people were not wealthy and had little to no financial planning. The vast majority of them shared that they had adapted to their situation and live within their means. They have adjusted their spending to the amount of money they have coming in every month.

It's really that simple.

 

It Doesn’t Have to Be Complicated

There are four categories of highest spending in any household. While financial experts will have you tap dance all over the place with investment products, it doesn’t really have to be that complicated. But it's very important to pay attention to these four categories.

  • Housing is the most expensive category for you to manage. It’s not just the house itself, it’s the maintenance, property taxes, insurance, and any updating you might want to do to your home. If you want to upgrade your kitchen or bathroom, or build a koi pond, these are large expenses to cover.

For some people, their home is their castle and homes will never say no to having money poured into them.

If you want to travel you will be paying twice for housing – your primary residence and the hotel or the vacation home in which you will spend part of the year. If you are not vigilant, this one category will suck the life out of your retirement.

Downsizing in retirement is not a bad thing. Relocating to a state or country with less taxation is a smart decision. Active adult communities have a variety of social activities and the maintenance of your front yard is taken care of in your lifestyle fees.

When you travel, you could choose to house sit, stay in a long-term apart-hotel or try Airbnb and live like a local.

Do you know how much your home (including the taxes, insurance and utilities) costs you per day? It is a figure that might startle you.

  • Transportation is the second highest category of expense. According to the latest AAA’s report on car ownership in 2017, the average new-car payment is $504. This is the interest on the loan, not the car payment itself. If you drive 15,000 miles a year, add to that figure above another $200 a month plus the amount of payment, averaging about $8,500- 10,000 a year. If your vehicle is paid off, you are still paying for maintenance, parking, licensing, insurance, washing, and fuel. On average, that is $2,400+ per vehicle, per year.

If you decide you want to fly to an island for a vacation, you must add in the cost of the flight, any boat trips, taxis from the airport to your hotel, and the price of a car rental.

In your daily life, you might consider becoming car-free, paring down to one vehicle, riding a bicycle, walking, using public transport, a golf cart, Uber, or paying a friend to take you somewhere like your weekly grocery visit. These options are far cheaper than car ownership.

  • Taxes.  Taxes can be sneaky things. It’s not just your income tax, it’s the tax you payon your phone bill, your gasoline, the soda, alcohol or tobacco you use, the hotels you might vacation in, the local city tax or your state tax rate.

You can arrange your portfolio so that your monthly income is taxed at the capital gains rate which is less than the income tax rate. Or you could move to a state that taxes you less.

This is a good area to examine in your annual expenses. It could be a large leak in the control of your finances that you are not aware of.

  • Food, dining and entertainment. When you track your expenses, this section of your annual spending will become clear to you.

Simple pleasures like a twice weekly latte at Starbucks add up. Or if you have expensive hobbies like golf or sailing, or yearly trips to foreign lands, or cruises. If you knew what you were laying out for this area of your budget, does it make the happiness-to-money-ratio for you?  

 

Summing It Up

If you focused on these above areas of great spending and modified them, you could find“extra money” for your own particular retirement lifestyle. Tracking your spending shows you where your money goes and why. Grabbing control of your finances brings about a confidence and security that is priceless.

Billy and Akaisha Kaderli are retirement experts and authors of The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible available on their website or on Amazon.com

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