Wealth & Wonder Vol. 20
Ever wonder why we always think that next week would be a better time to start going to that Pilates class, or give up Diet Coke (lol yeah right)?
Why we’re so certain that while we can’t do it right now, in the future we’ll be better equipped to be disciplined, dedicated, and virtuous?
The excellent book Fixed, by John & Campbell and Tarun Ramadorai, references research that shows that the area of the brain that is active when we think about our future self is the same area that activates when we think of an entirely different person.
Put simply, we think of future us as a stranger.
And this makes sense, right? No wonder I always assume future me will be excited to work out, and pumped to eat just lean proteins and vegetables when right now I want to gobble down a burger and fries like a little gremlin (just me?).
And this is also why it’s so hard to save for our future selves. We don’t even know her.
But the fact is, we will become that future version of ourselves, and we don’t want to wait to get there only to realize we have to keep working until we die.
So how do we figure out how much money we need to retire?
Enter the ✨4% rule.✨
The 4% rule says that, if calculated correctly, you can live safely withdraw 4% of your assets each year for 30 years if you accumulate the right amount of money over the right period of time.
For example, if you know you want to be able to spend $80,000 a year when you retire, you would calculate $80,000 * 25 (the inverse of 4% - just trust me, I don’t understand how it works either. I’m a money nerd, not a math nerd).
You’ll need $2,000,000 by the time you retire to withdraw $80,000 from your portfolio each year for 30 years.
Gulp.
$80,000 might be really high, though. You won’t have commuting costs, you won’t need work clothes and equipment, and work lunches. Maybe you own your home outright by this time, and have no debt payments. Maybe you can live comfortably with $40,000
So $40,000 * 25 = $1,000,000
So we know we need between 1-2 million to retire.
See why it’s important to get started now?
You might be asking, "How will I ever save $1,000,000 by the time I’m 70?"
Answer? You won’t. You’ll save a fraction of that and let the markets and compounding interest do the rest.
Take some time to think through how much you might want to live on in retirement.
A good rule of thumb is to look at how much you spend right now and go up or down from there based on differences you anticipate in your future.
Like maybe you want to travel more, but also you'll own your home, so you won't be paying mortgage payments.
Play around, it can be fun to imagine the future that strange version of you gets to live!
So, how do we make this happen?
Start by investing in a retirement vehicle, like an IRA or Solo 401(k), every year, and allocate that money to a mix of equities and bonds (called diversification).
You will accumulate money at a level far higher than the actual cash you put away.
What are a Roth IRA and a Solo 401(k)? Stay tuned, and we’ll talk about that next week.
If you can’t wait and want to ask me questions now, reply to this email, and we can chat all about it.
In Wealth & Wonder,
Kacy
P.S. I gave up Diet Coke once before, and it had a profound impact... on my will to live. I won't be making that mistake again. What's the vice you just can't quit? Reply and let me know!