Are you ready for a spicy question? Maybe it’s a little spicy; we’ll see. It says, “What’s the point of saving 25% for retirement to replace all of our income when expenses will likely decrease from the already self-imposed scarcity of pre-retirement spending? So, what’s the point? Why save 25%, especially if I think my expenses are going to decrease in the future?”
Man, can I let you have the analytical part, and I do the emotional part? Begin.
Yes, you can. What was the name? Seth. Seth. Seth, I want to tell you a little story. I thought I was going to retire at 50. No, not Will Smith, um, I thought I was going to retire at 50 years of age. So, when I was in my early 20s, I started saving and investing like I was going to retire when I was in my 50s. When I hit 50, I’m soon to cross the threshold of 50; I am no closer to retirement than the man on the moon. There’s a chance I might be doing this on the day that they roll me out on the gurney. Um, because I just love this. I absolutely love it. But I’ll tell you what, if you can save and invest that 25% as early as you possibly can, Seth, you get to live life on your terms. You own your time sooner, um, and you get to have choices and options.
Right now, when you’re young and you’re starting out or whatever, even if you’re in the messy middle, you feel like you don’t own your time. You feel like you have to go work for the man to get your money, and it’s a tough situation. So, if I can get you to do a little bit more earlier so that you then do things on your terms, you work because you want to work, that’s a very powerful thing. It’s a very flexible thing. Um, now what’s crazy for me is the things that I spend money on, um, typically even come back. Like when I make a crazy investment on us doing this studio, so you guys get a better version, more of you show up, you know, it’s the coolest thing. I’d rather have the flex in the system, the margin to where I get to do things on my terms than to be so tight and scarce with resources that I have to do it on somebody else’s terms.
That’s what we’re trying to do for you, Seth, is give you the margin to live your best life. Now, we take a lot of flak on this when we do fire content, right? We’ve done a lot of fire content. There are people like, “Oh my gosh, why are you talking about income replacement? You talk about expenses.” You are correct. When it comes to retirement, when it comes to financial independence, expenses are the thing that matters, not the percentage of pre-retirement income.
Here’s the real problem for most people; they don’t have an accurate view of what their expenses will be in retirement. So, you know what the best metric of what your current lifestyle expenses are? The percentage of your income that you’re out there spending. So, it’s just a really easy number for us to get our heads wrapped around to help us start moving towards the number. So, the question is, “All right, well, why do you guys save 25%?” Well, it’s fairly mathematical. Nate, can you pull up the thing we have a resource that you can go check out at moneyguy.com/resources? That’s called “What can 25% do for you?” Right? And basically, what Seth is, different agents, you don’t have that one over there. I wasn’t going to tell you. Basically, what it shows is, at different ages and stages, if you start saving 25%, how much of your pre-retirement income could you replace?
Now we’ve already said that pre-retirement income may not be the best metric. It’s really more about the expenses that you’re going to acquire, the expenses that you will have in retirement. Well, what 25% allows you to do is get closer and closer to that stage where you actually know what your retirement expenses are going to be. Your mortgage is paid off; you know where you’re going to live, your kids are out of the house, you know what you do for fun, you know what kind of cars you drive, you know how much you like to travel. Well, saving 25% is going to be a great method to get you to whatever the number is needed to replace his expenses. If instead, you say, “Well, I’m not going to save 25%, I’m super tight, I’m only going to save 10% of my income,” well, that extra 15% is going somewhere; you’re doing something with it. I’m arguing you’re likely going to be spending those dollars.
So, that’s what the point of 25% is. We actually want to set you up for a realistic retirement, financial independent scenario because, BR, we see this all the time. Someone says, “Hey, I’m retiring at 65.” We’re like, “Awesome, cool. What have you been doing?” “Oh, well, I’ve been putting money in my 401k, got about 200 grand in there.” And we’re like, “Okay, cool. Well, what are you going to do in your retirement?” “Oh, well, I got to get a beach house, and I want to, and we’re going to get a boat because I wanted a boat, and then I want to travel.” You know, we kind of travel bugs, want to wander, and we’re like, “Hey, the things that you want and the things that you’ve done to prepare for what you want do not align. If you can figure out 25% early on in your financial journey, you have a much greater likelihood of being able to do all those things that you want to do in retirement when you actually figure out what your true retirement expenses are.”
Yeah, I mean, that’s something that’s a whole show we could do is that I think a lot of people don’t understand yet. You’re right; your expenses will go down post-80, 85, um, because you’re just not as mobile. But it’s not uncommon for retirees in the first few years to spend more money than they actually made right before retirement because you are doing more traveling; you’re playing a lot more golf; you’re doing a lot of activities. Plus, you’re, you’re no longer, you don’t realize how much work keeps you from spending money. From spending money, that’s exactly when you no longer have work. You might be surprised, especially when you’re in those super active years. You might need more of those resources than you realize. So, I’d rather you, once again, be fat on having money underneath you than being super lean and, you know, staring at your significant other going, Man, if we just saved a little bit more like those guys said, you know, maybe we could be doing more stuff; we’d have a lot more fun out here instead of doing this super lean, you know, retirement that we’re doing. For more information, check out our free resources.
