How to retire on $30,000 a year
Seven out of 10 millennials think they鈥檒l聽聽in retirement.
The question is whether they鈥檙e frugal or overly optimistic. When that research came out recently 鈥� from the Insured Retirement Institute and the Center for Generational Kinetics, which also noted that today鈥檚 65- to 74-year-olds are spending an average of $46,757 per year 鈥� much of the reaction reflected the latter view.
But more than half of Americans聽, according to Social Security Administration wage data. Surely, then, it has to be possible to retire on that amount 鈥� or, in the case of millennials, an equal amount in future dollars. How?
Start budgeting now
Many people don鈥檛 know what they鈥檙e spending money on today, let alone what they鈥檒l spend money on in 30 or 40 years. Enter budgeting, which solves both of those problems.
Aside from its obvious benefits 鈥� people who budget tend to spend less and save more 鈥� your budget today can help you get a handle on your budget tomorrow, says Jason Preti, a certified financial planner with Unleashed Financial in Kirkland, Washington.
鈥淚f you actually have a good working budget right now, you can identify what鈥檚 going to remain in retirement, as well as what鈥檚 not going to remain,鈥� Preti says. 鈥淵ou can see that you鈥檙e not going to need dry cleaning in retirement, but with no vacation time to worry about, you might increase your travel expenses, for example.鈥�
The most notable line item you can kick when you鈥檙e retired? You鈥檒l no longer have to save for retirement.
Say no to debt
Or at least pay it down. People who go into retirement with debt 鈥� whether from a mortgage, car payment, credit cards or personal loans 鈥� increase their cost of living substantially.
Even a small mortgage of $150,000 at 4% interest carries a $700 monthly payment. Add in a $200 car payment and some credit card debt and you could easily be forking over $1,000 in debt payments each month. That鈥檚 40% of your monthly budget when you鈥檙e living on $30,000 a year, or an even greater percentage if your income is taxed.聽
Be prepared to move
Where you decide to live can have the biggest impact on your retirement spending, Preti says. 鈥淭hat definitely dictates how much your base cost of living is going to be. If you retire to lower-cost-of-living Florida, you could be living like a king on $30,000.鈥�
If you鈥檙e truly committed to retiring on that kind of income, and you currently live in a high-cost-of-living city or state, you鈥檙e eventually going to have to relocate. Florida has a reputation as a retirement-friendly state for a reason, but it鈥檚 not your only option. A聽聽shows that Texas, Louisiana and Arizona are also inexpensive places to retire; specifically New Orleans, El Paso and Mesa. If you鈥檙e interested in a smaller city, you鈥檒l find聽. 聽
Count on Social Security
There鈥檚 much concern that Social Security will become insolvent before today鈥檚 youngest generations retire. In reality, that鈥檚 unlikely to happen, though there may be changes to the system, Preti says.聽鈥淚t might be phased out significantly as retirement incomes rise, but it鈥檚 a society support system that will not go away.鈥�
Social Security鈥檚聽聽back that up, so you should tack that benefit on to your budget.聽(Calculate what you might expect to receive聽.) The average monthly benefit today is just over $1,300; in a few decades, it will be several times that, even factoring in proposed cuts.聽
Keep in mind, though, that health care costs will eat into your retirement budget: According to a聽聽from the Kaiser Family Foundation, Medicare beneficiaries spent an average of $4,734 out of pocket in 2010. That number, too, will go up by two or three times by the time you reach retirement.
Be realistic
Just because you can retire on $30,000 鈥� today, or in inflated dollars in the future 鈥� doesn鈥檛 mean you should, or that you鈥檒l want to.
鈥淚 would like my clients to have the same or better standard of living in retirement. And if you really want the same or better, you鈥檙e going to be spending more. You鈥檒l have more time on your hands, you鈥檒l hopefully be healthy, and you鈥檙e going to want to go places and do things,鈥� Preti says.
It鈥檚 a valid point: When you鈥檙e fresh out of college, paying off student loans and sharing a cramped apartment with a roommate, $30,000 isn鈥檛 a challenge, it鈥檚 a luxury. But as your income increases over the years, it鈥檚 harder to scale back, particularly when you have 鈥� as Preti says 鈥� a lot of extra time on your hands. Time isn鈥檛 just money; in some ways, it聽肠辞蝉迟蝉听money.
So while it鈥檚 comforting to know that it鈥檚 possible to live on $30,000 a year, it鈥檚 also a good idea to aim higher and聽聽when you鈥檙e young, because you can鈥檛 know for certain what the future will cost and you may want some flexibility. 鈥淵ou want to plan for the worst,鈥� Preti says, 鈥渘ot plan for the best.鈥�
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