I did a thought exercise the other day: where do I want to be in terms of finances and possessions in ten years? In thirty years, when I’m 66? I have some possible retirement housing options in mind, but I also want to think about how to get to a point where I have $40,000 in yearly income (in today’s dollars). That plus Social Security should give me a very comfortable life; right now I’m only spending about $17000 a year on life stuff! Add to that $10000 a year for travel and general fun, and I’ll be all set. 🙂 (The rest is for taxes and medical care, of course, and also because I assume I will not end up paying the equivalent of $400 a month for housing forever.)
I am not a spreadsheet maven, but luckily some members of the PF online community are, so I decided to use a couple of recent tools and plug in some goal numbers to see what I’d have to do to get there.
In ten years, at 46 years old, I’d like to have $100,000 in tax-advantaged retirement accounts, and $20,000 in a taxable brokerage account. According to J. Money’s Early Retirement Spreadsheet, that amount plus a yearly contribution of $15000 should get me to retirement at age 64. Looking at my parents and their friends, that seems about right; they are all in their mid-60s and obviously slowing down. I think by 65 or 66 I will want to move away from the daily grind of work, although depending on how my life is going I may well do a little teaching or take on other finite projects.
I also have some shorter term goals:
- While my immediate e-fund goal is $5000, and this should be reached this fall, I’d like to get to another $5000 in e-fund money. I don’t expect my monthly expenses to stay this low forever and I’d like to have $10,000 in cash available within the next three years (starting now).
- by age 40, four years from now, I’d like to be able to pay mostly cash to replace my car, assuming I haven’t done it already because my current car broke down. (If that does happen, I’d just like to have “as much as possible” on hand for a down payment.) Due to needing to build my e-fund up, I can’t start saving for that goal seriously until early next year, when I’m 37, so let’s say I have three years, and let’s further say I want $10000 for that, in order to minimize what I have to finance. (I’m assuming I’m going to want a nice new-to-me car; if I were replacing my car today, I’d be getting a 3-4 year old Honda Fit from Carmax, and they are running $12-15K.)
All this savings has to be on top of whatever I’m putting away for normal life expenses, travel, etc. Ouch. It’s feeling kind of intimidating. However, last year I thought I’d never get my e-fund up to six months’ expenses and I’m well on my way to that now, so I’m going to try to buckle down on this. It’ll help if I get a better paying job at some point in there, of course, although my expenses (which are insanely low right now, especially for housing) might also rise.
At this point, I turned to Bridget’s Millennial Money Spreadsheets. Although I am not a millennial, they are still very useful and pretty 🙂 I used two of them to make these calculations. In one, she lets you plug in figures that show how you can save $100,000 in seven years. My goal is actually $120,000 in ten years, but that’s close enough for me 🙂 I gave it my starting balance of $14000, which is what’s in my retirement accounts right now, and told it to assume 6% returns. According to that, if I keep adding $1000 a month as I am right now, I’ll actually have $124,000 in seven years! Even when I told it to assume a 0% return, I still got to $133,000 in ten years. At 6%, I’d have $184,000. My takeaway: I think I should keep up with the $1000 contributions for a while anyway. I can always reduce them later if I need to save up for another goal, and feel reasonably secure that I’ll get where I need to be. However, I should consider moving some of that contribution into a taxable brokerage account instead of having it all in tax-advantaged accounts, I think.
Then I turned to my car goal. If I’m going to save $10000 for that in about three years, Bridget’s second spreadsheet tab, the “Two Year Simple Savings Plan,” tells me that $275 (beginning January 2016) in a “new car fund” ought to do it. This is assuming I save up for the car in my savings account, which right now is giving me 0.75% interest (sigh). I wonder if I shouldn’t save up for it in a taxable brokerage account instead — but a three-year time horizon seems tricky for that.
As far as the emergency fund: using the same spreadsheet, $204 a month ought to get me to my goal within two years (also beginning January 2016.) Let’s say $205 which is a less weird number.
Well, this is actually pretty interesting. According to these calculations, I can get to where I want to be by age 40 and by age 46 (and thus, eventually, to age 65 or so) by saving:
$1000 towards retirement a month, divided between taxable and tax-advantaged accounts (leaves a lot of room for elasticity, market crashes, etc; as long as the markets at least break even, I’d still beat my goal.)
$275 a month towards the purchase of a new-to-me car (starting January 2016)
$205 a month towards the emergency fund (starting January 2016)
And right at this very minute, I’m saving…$1000 towards retirement, and $500 towards my emergency fund. (And $250 for travel, but I expect to spend that, so.) So, without my salary increasing at all, I can keep saving pretty much exactly what I’m saving now, and get exactly where I want to be. I can even redirect $20 towards some other savings goal without, again, changing a thing.
Having gone through these calculations, I now feel simultaneously optimistic and intimidated. My current savings rate is working because I’m spending very little unnecessary money. I’d like to have a dog; I’d like to loosen up the purse strings a little more when it comes to travel and entertainment; I’d like to give money away more freely. I doubt I can expect to keep my rent at its current level forever, moreover. Last year, living on my own in a very, very modest 1-bedroom apartment, I was spending about $850 a month on rent and utilities, $450 above my current; that $450 more or less represents my emergency plus car savings, right there. I just don’t know. But this is an interesting exercise to have gone through. If I got a $10,000 raise in the next year (not implausible, actually) I could free up an extra $500 or so a month to cover some lifestyle inflation while still saving. Chewing it over….