Get Good with Money by Tiffany the Budgetnista Aliche

Author:Tiffany the Budgetnista Aliche [Aliche, Tiffany]
Language: eng
Format: epub, pdf
Publisher: Harmony/Rodale
Published: 2021-03-30T00:00:00+00:00

THE DO

Here are the four Do’s necessary to get started on investing for retirement:

1. Determine how much you need to save for retirement.

2. Decide where to put your money.

3. Choose your investment mix/asset allocation.

4. Set up automation and limit your withdrawals and loans as much as humanly possible.

The Do #1: Determine How Much You Need to Save for Retirement

Before you can invest money for your retirement, you have to start with savings, your savings rate to be specific. Your savings rate is how much you earn minus how much you spend, expressed as a percentage. For example, if you earn $1,000 and you save $300, your savings rate is 30%. There are two ways to increase your savings rate: (a) earn more, or (b) spend less. I showed you how to do both of these in Chapter 2.

I also shared in that chapter that one of the key purposes of your savings is to have money to invest. Welp, it’s showtime! Your ability to save is going to play a big role in your ability to retire. The more you can save, the more you can invest and the faster you can retire.

If You’re Looking to Retire Early…

If you want to be a little more than averagely aggressive about saving for retirement and possibly retire early, the simple math is to multiply your annual expenses by 25. The total is what you’ll need to be as comfortable as you are now with the help of the 4% Rule, which states that:

A person with 25 times their annual expenses invested for retirement will likely never run out of money, when retired, if they only withdraw 4% or less money from their retirement account to live off of each year. This even accounts for the inflation (increase) of the cost of your expenses over time. This reasoning is based on the fact that the annual market rate of return is, on average, greater than 4%, year after year. For the last thirty or so years it’s yielded around 7% to 8%.

So you only need to make at least 4% on average on your investments each year. And if you do this, you can live in retirement off your interest and not your principal (your actual retirement money). If your retirement investments make more than 4% in a year, woot, woot! You can reinvest the difference to offset the years you might make less.

THE FIRE MOVEMENT

If you have dreams of retiring early and you’ve explored what kind of investing can get you there, you’ve likely come across the concept of FIRE. FIRE stands for Financial Independence, Retire Early and striving for it has become a movement that’s spread like…well, wildfire.

It’s something that was first introduced in a book called Your Money or Your Life by Vicki Robin and Joe Dominguez. The basic gist of it is that you have to shift to a strategy of aggressive saving—up to 70% of your income—and investing it until you’ve reached a number that represents about 30 times that of your current annual expenses.

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