Retirement Made Easy: A Simple Formula

Retirement Made Easy: A Simple Formula

I often like thinking about how to make complicated nuanced things easy to understand.  The other day I was meeting with early 50-year-old clients, and we were discussing retirement.  What they will do in retirement, how they will live, and what will make them happy.  They clearly aren’t ready to retire yet financially, and thus the conversation morphed into how to get them to retire as soon as possible. 

Naturally, after we spent all this time discussing what it would look like, the conversation naturally moved to how they can best prepare financially for what lies ahead, retirement.  I said, “look the formula for retirement is rather easy.  Your focus until then is to maximize investments and minimize expenses.”

Maximize Investments

Let us break apart and analyze these two pieces of my advice.  First, maximize investments.  There are numerous ways to do this, starting with looking at what you are saving/investing.  If you want to have the most amount of investments possible in retirement the key here is to save aggressively. 

Can you increase your 401(k) by a few percentage points?  How about taking that bonus and instead of spending it all why not invest a good chunk each year?  Perhaps even start or increase what you are investing in a brokerage account above and beyond your 401(k) as well. 

The other way to maximize your investments is to look at how they are invested.  Are your investments professionally managed?  Are they aligned with your risk profile, or can you afford to have some more “growth” assets in there to help maximize your probability for better returns? 

The benefit of maximizing your investments is enormous.  Inevitably, the amount of investments you have saved will directly correlate to how much you can spend in retirement, when you can afford to retire, and what that lifestyle will look like.  To me the more the better as it simply leads to optionality and that is key when it comes to financial planning.

Minimize your expenses

Now, shall we look at the other side of this coin.  The other side of this equation is to minimize expenses.  Effectively, this is directly linked to your investments as the less you need or want to spend in retirement the less funds you need to have to support that lifestyle.

I look at this in two parts the fixed and the variable.   We can do things to minimize our fixed cost such as paying off mortgages or car loans.  Doing house projects before retirement.  Or getting rid of other regular fixed expenses that are superfluous or can be addressed before retirement.  If you once needed $10,000/mo to live and now you need $5,000/mo to live your investment amount is roughly half that is required to retire.

As for your variable expenses can you adjust these as well to not compromise lifestyle/happiness, but perhaps work smarter not harder.  For instance, perhaps eating in vs going out to dinners more.  Or sell that second house and rent when you go the shore.  Maybe for you it is simply doing less aggressive or expensive vacations or hobbies.  Regardless, we all have variable expenses that we choose or want to do.  Take a hard look at yourself and see if there are ways to lessen those burdens.

In the end

In the end this is a complicated formula broken down to its most basic form.  The more investments you have the more you can expect they can subsidize in retirement.  The fewer expenses you have the fewer investments you need to subsidize in retirement.  The equation is that easy. 

Now the question is what if anything you are going to do with this information?  There is nothing wrong with choosing one or both sides to address but remember a journey of a thousand miles starts with the first step.

Stay wealthy, healthy, and happy.