How much do you need to retire?

One of the topics I am passionate about is personal finance. It is not because I like budgeting nor I am a math nerd. But I harness the power of telling what the money does for me. In the end, it is my hard-earned money which I poured my energy and time in.  I want to be the one who have the control and to tell where my money should go.

How much do you need to retire?

‘Retirement? Me? This is not what I need to think about now’ ‘I am so young, there is still plenty of time’  According to the GoBankingRates survey that was done in 2015 at three age groups: millenials, Generation Xers, baby boomers and seniors,  only 56% of Americans have less than $10,000 saved for retirement – and one-third of them report they have no retirement savings. The gap between men’s and women’s retirement is also concerning: Women are 27% more likely than men to say they have no retirement savings. 63% of women say they have no savings or less than $10,000 in retirement savings, compared with 52% of men. A lot of statistics also showed that wives outlive their husbands. Therefore, their savings needs are greater than men’s. With increasing cost of living and higher medical costs in retirement age,  women need to be proactive and start planning ahead.

Imagine one day when you retire, cooking your favorite food, walking on the beach while listening to the ocean waves, doing something that means a lot of you, such as helping at your local charities, or visiting new countries and experiencing new cultures? How do you set yourself up so you will get to enjoy all these when you retire? What is the right age for retirement? (Can I retire in my 40s?) How much do I need to retire comfortably?

There are several things to keep in mind to achieve your own financial freedom.

• Have big dreams: Imagine all the freedom that you have and you get to choose what you want to spend your time and energy on. What an incredible feeling it is when you have the ability to do the things you always want to do; not what others tell you so. What will your ideal retirement life be? Whether it is to start your own business, travel to a new country every year, spend quality time with your spouse and family, or pick up a new hobby. First, you got to have big dreams. So, go ahead, dream big for yourself.

• Plan carefully: Set a number goal. Apply the ‘4-percent rule’, a theory which was first introduced by financial planner Bill Bengen in 1994, asserts that you need enough saved to be able to meet your annual expenses in year one of retirement by withdrawing 4 percent of your nest egg. For example, if you need to generate from savings $40,000 to cover expenses in year one, you’ll need to have $1 million saved for retirement ($1 million x 4% = $40,000). Now reverse the math – Being able to withdraw 4 percent in year one means having 25 times your annual spending invested for retirement. Assuming $100,000 in annual spending, you’ll need a $2.5 million nested egg. But if you can cut your retirement spending in half, and live on $50,000, you’ll only need $1.25 million.

• Start early: Mr. H have started contributing to his 401(k) in his first job when he graduated at 21. He didn’t make a lot back then. He was making around $22k a year, but he diligently saved 10-15% of his salary to his 401k account, without even thinking about it. There were times when I was not working and staying home with kids, he was still managed to make a minimum of 10% contribution. Throughout years, his salary has continued to increase and he got several jumps and promotions. Fast forward 17 years later, his 401(k) account is close to $500,000 as of January 2018. And he is only 38 years old! Talk about the power of compound interest! We never adopted any special investment strategy. We only invested in the mutual funds that the company provides. And we are not experts in investing. We only log onto our accounts occasionally and re-balance if necessary. It is fun to watch how much the portfolio grows and it is kinda on auto-piloting after it has grown to a certain amount. You will be amazed how fast your retirement account continues to grow. At a certain point, we feel like the growths and dividends generated from the portfolio is more than what we have put in in a year! I do understand lives have its ups and downs, and there are always times when you need the extra cash in hand (like saving up for a down payment for a house, having your first child, helping with medical problems in the family, etc.). However, focus on the end goal and you will be glad that you started early.

Don’t worry if you haven’t been contributing much in your retirement account either. I did not start putting money into retirement until in my late twenties after finishing my graduate school, and I was staying home to watch the kids for a while. However, once I was back to the workforce, I started contributing 15% of my income on my company’s 403(b), and Mr. H and I plan to do Roth IRA in this year as well. Don’t ever give up and start saving!

• Last but not least – stay away from debts: Avoid putting yourself in debt. Through trials and errors, Mr. H and I learned that the quickest way to build wealth is to put our money straight into our saving account! It sounds silly I know. We have put away our credit cards and started using only cash and debit cards last year. Then the most amazing thing happened. We paid down the balance of the credit cards and wiped out my student loan in 7 months! Since we no longer have to keep track of any new credit cards bills, we were able to devote all our energy and resources into paying off the remainder of the debts. After they were completed paid off, I swear it felt like 100 pounds lighter on my shoulder. It is unbelievable how long I have had my student loan with me. Now besides regular household expenses and our mortgage, we are able to save all of our money because we have no car payment, no student loan payment and no credit card payment. Woohoo!

It is not as hard as you think. Start saving as little as 5% of your income can make a huge difference long term. Take advantage of your company matches. The key is to start saving regularly – be consistent and and let your savings grow in time.