How much do you need to retire? The typical answer posits some sort of formula based on how much you earn now. It then tries to calculate how much money you need to put away in order to amass that annual salary by the age of 65.
But if you start the calculation a different way, the answer changes significantly.
Instead of asking yourself how much you spend now, ask yourself how little you could spend and still be happy.
If you need less money to live on each year, you don’t need to save for nearly as long as the typical retiree. This is because you are (a) living on less and (b) by living on less, putting more money in your retirement portfolio. This is the basic premise of the popular personal financiers like Mr. Money Mustache, who lives on about $27,000 per year. The less money you need to finance your lifestyle, the more money you can save, and the sooner you can retire.
Thus began an interesting conversation with my boss:
Boss: How much do you need to live on when you retire?
Me: I don’t know. Maybe … $35,000?
Boss: No! That’s poverty level. You need more than that.
Me: I’m assuming my home will be paid off and my student loans will be paid off.
Boss: You still need to pay property taxes.
Me: OK, so … $40,000.
Boss: (looks skeptical)
Me: Well, now I’m curious. Let me look at my budget. (Opening budget spreadsheet) So, no rent payment (hitting DELETE on my spreadsheet). No student loan payments [DELETE]. OK, fine. You’re right. More like $55,000 per year.
Boss: (still looking skeptical, but a little more smug) What about having kids in college?
Me: Oh! I forgot — no daycare! [DELETE]. No life or disability insurance [DELETE]. No commuting expenses [DELETE]. (now I’m really smiling) $28,658! That’s how much we’ve been living on the past year, not including rent, loans, daycare, and work expenses. So, that’s the minimum we would need — adjusted for inflation of course — to retire.
Boss: $37,000 a year? (guffaws) No! I mean, “how much do you need to be happy?”
Me: I am happy.
Boss: But what about vacations? Going out to eat? Having fun?
Me: I don’t know what more to tell you, Boss. I am happy. I have fun. I’d love to have more spending money, but it’s not getting in the way of my happiness.
Over a year ago, I may have had the same reaction that he did. But, of course, something happened: We started focusing on paying off our student loans by cutting back on our expenses and putting any extra income towards the student loans. Right after we cut our gift-giving budget in half, Fathers’ Day rolled around. I planned an entirely free day to celebrate, by picking up a pass at our local library for free kayak rentals at a local park and packing a picnic lunch for later. I invited my parents to join us. We had a wonderful time.
I don’t wonder “am I happy?” anymore.
If the subject comes up, there is one image that pops into my mind: Fathers’ Day 2013. There have been many moments in the subsequent year that compare, but that was the seminal moment — when my life changed and became “happier without stuff.”
I doubt our conversation will make my boss think twice about all those beers he buys at bars, lunches he buys at the hipster restaurants, or the lawn service he pays for. For all I know, those expenditures do make him happy. It’s honestly none of my business, and I’m sure if he asks 10 people if they’d be happy living on $35,000 a year in retirement, 9 of them would probably say “no.” He happened to have asked the wrong person!
Regardless, I am thrilled that we are so happy living on so little. Now, I know that it doesn’t compare to those who have actually retired early. I know we could always save more money and spend less money. For now, I’m happy with our number.
Understanding that money does not buy happiness might be one of those things you have to experience to believe.
So … how much do YOU need to retire?
Image credit: anankkml from freedigitalphotos.net