How to Take on Retirement Planning

I think it’s safe to say that we all have the goal of one day reaching financial independence. That is, the point at which we have enough money in savings and investments to support ourselves for the rest of our lives. So, how much money is enough?

Most of the time that question is answered with a single big number. And it’s true that in the end you’re working towards a single total amount of savings and investments. But that total number is composed of many smaller numbers representing the savings you need to support each individual expense.

What if you looked at it that way? What if you broke it down by how much money you’ll need to support each expense, each habit, and each indulgence for the rest of your life without ever working again?

How Much Does That Gym Membership Really Cost?

Let’s look at a single expense. Say your gym membership. And let’s say that costs you $40 per month. How much money do you need in order to support that expense for the rest of your life?

Using the 4% rule, which says that you can withdraw 4% of your savings each year with minimal risk of ever running out of money, it becomes a simple math problem. Take the monthly cost, multiply it by 300, and you get your answer.

In this case, $40 multiplied by 300 equals $12,000. That is, you need $12,000 in savings to support that monthly gym membership for the rest of your life.

Values-Based Decision Making

Looking at it this way can help you make more informed values-based decisions when it comes to spending and saving.

For example, how long will it take you to save the $12,000 needed for your gym membership? And which do you value more? That habit or the ability to be financially independent a little sooner without it? What about a $500 per month car payment? That will require $150,000 in savings. Is that an expense you’d like to support?

There are no right or wrong answers here. The goal is simply to understand how each expense affects your savings need and to make decisions based on what you value.

How to Plan Differently

Next time you look at your budget, I would encourage you to do a few things differently. Consider the options related to each expense. For example, you could have a $500 per month car payment or a $200 per month car payment or take the bus, let’s say that is $50 per month or walk, $0 per month.

Then, for each category, multiply your monthly budget by 300 to see how much money you’ll need in order to support that expense for the rest of your life.

Finally, step back, look at the numbers, and think about how they align with what you truly want out of life. You may find that you want to cut back on certain things. Or you may find that you want to save more in order to support important expenses.

Either way, you’ll have a better understanding of what it takes to reach financial independence and put your money toward what is most meaningful to you.