#4. Step 2: Becoming A Master Saver
Updated: Jan 22
Well, maybe not master saver, but at least an apprentice saver?
Anyways, on to Step 2 and finding our retirement number! This required me to do a deep dive into our finances. This was a well-needed exercise regardless of this Seven-Year Time Challenge we are on. I looked at our previous 2 months of expenses and came up with three numbers. The first number is how much do we absolutely need to pay our current bills, debts, and eat cheap but healthy food (I am considering this our financial independence number). The second number is how much we actually spend on average per month. The third number is my best guess on how much we would spend in retirement to live the lifestyle we currently want.
A quick side note regarding inflation. I am doing this based on today’s values. I plan to revisit my final retirement number yearly, due to this number changing with inflation.
Cool Retirement Numbers
First Number – Current Financial Independence Number
Car payment: $338
Student Loans: $560
Car Insurance: $127
Gas for house: $85
Gas for car: $150
Current Financial Independence Number per month: $2,710
Second Number – Current Average Spending Number
Current Financial Independence Monthly Number: $2,710
Food Spending (minus $300 for inclusion above): $1,116
Monthly subscriptions (includes Spotify, Prime, Twitch, Hulu, Netflix, and YouTube): $139
Amazon purchases shown on bank statements: $505 (it was Christmas season . . .)
Investments (includes my wife and my Roth IRAs and her 403(b) through employer): $2,000
529 Contribution for Son: $250
Miscellaneous (nonfood): $1,027
Current Average Spending per month: $7,747
Third Number –Retirement Monthly Number
Car payment: $0
Student Loans: $0
Car Insurance: $127
Gas for car: $200 (I increased this due to us wanting to travel more and price increases)
Gas for house: $85
Food: $600 (non-travel related food costs)
Travel/Vacationing/Frivolous Spending: $1,500
Monthly subscriptions: $90
529 Contributions: $500 ($250 per each child, since we do plan on having a 2nd child)
Investments: $1,080 (maxing out our Roth IRAs until around 55 years old)
Retirement Monthly Number per month: $5,332 (this will be lower once I reach 55 years old and the kids are 18 years old because there will no longer be 529 and Roth IRA contributions. This number would be $3,752 without these contributions)
To break this information down more concisely, see the following monthly breakdowns:
Financial Independence Number = $2,710
Current Average Spending Number = $7,747
Current Retirement Number = $5,332
What do these numbers mean? Using the famous 4% Rule*, if we solely relied on our investments of stocks and bonds to pay for our retirement (which is not the plan), we will need to have saved up 25 times our annual expenses. Using this formula – and again, assuming we plan to solely rely on our investments in stocks and bonds to pay for our complete retirement – we would need the following amounts invested to pay for each of the three above lifestyles:
Current Financial Independence Number (“FI Number”) = $813,000 ($2,710 (monthly number) x 12 months x 25 = $813,000)
Retirement Number Needed to Continue Current Lifestyle = $2,324,100 ($7,747 x 12 months x 25 = $2,324,100)
Desired Lifestyle Retirement Number (including keeping up Roth IRA and 529 contributions) = $1,599,600 ($5,332 x 12 months x 25 = $1,599,600)
Of Note: Our current dollar amount of investments in stocks and bonds (divided between 403(b), Roth IRAs, Trad IRA, and Brokerage Account) is $149,249.
So what does all this mean? With our stocks and bonds alone, we are currently $663,751 away from Financial Independence (The Math - FI Number of $813,000 minus current value of stocks and bonds of $149,249 = $663,751 away from reaching FI).
There are other ways to earn passive income during retirement, and I plan to investigate these other avenues to help gain financial independence when I get to Step 4.
My Profound Final Thoughts
When I started running these numbers, I could not believe how much discretionary income we spend on random things. After my wife and I went through these numbers, our family’s plan to cut down our spending on “wants” is to attack one category at a time. We feel this will be the best way to make an impact that will help us make forever changes, as opposed to going cold turkey and quit caring in two weeks (like a lot of my diet efforts in the past).
We will first focus on the category of food, which averages about $1,400 of our monthly income. Expect a future post doing a deep dive into our grocery lists, meal planning, and things we plan to do to save money. Starting with food should immediately help us invest an additional $1,000 per month!
This was a major deep dive into our finances that was a little embarrassing to share. I wanted to share it though to be as transparent as possible. We will revisit the final retirement number in the future, but this is the number we are using going forward in our Seven-Year Time Challenge. Now that Step 2 is accomplished (please go to my second post if you wish to see all the steps going forward), onward to Steps 3 and 4! I imagine these steps often co-mingling.
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*The 4% Rule is a way for people to measure how long their portfolio will last them in retirement. Please see this article from Investopedia which does a great job explaining it better than I ever could.