How Much Wealth Do you Need For Retirement?
Every day they needed some water in the house, so they would go to the river that was 5 miles away and fetch some water. It was tiresome work, but they had to do that because no other water resource was available.
Person A fetched water every day. But somehow, more than whatever he was bringing home was needed. So he would go into the neighborhood and ask his neighbors to lend him a bucket of water or two. He promised to return the favor someday, but that has never happened. Slowly people understood that he would not change his habit of overuse of water and stopped helping him. As everyone lost trust in him, he and his family had to settle in isolation.
Person B continued fetching water throughout his life, even when he was sick and tired. When he was too old to bring the water, he expected his children to do that for him.
Person C was a little wise. He thought of his old age beforehand. So he constructed a water tank near his house and poured and saved some extra water daily in that tank so that he would have water in his old age and sickness. But he was always worried about whether the water tank size was suited for his need in old age. What if he uses and finishes all that water while still alive?
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Person D was different. He dreaded fetching water every day and certainly did not want to do that for the rest of his life. Neither was he ready to use stale water like his neighbor C and get worried if the stock of water would be sufficient for his lifetime. So he put this thinking cap on and put in some extra effort to have a continuous water supply throughout his life and for his children. He builds a pipeline from the river to his house.
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No one was right or wrong! Everyone had different ways to tackle the same problem based on their knowledge, experience, capability, and willingness! Which one do you resonate with?
Retirement is the mirage that keeps most of us going through the ups and downs of working life.
What does retirement mean to you? Freedom to choose how you spend your time? Freedom to do whatever you want? Enjoy life (finally???)
Think for a moment! How much money will you need to live well in retirement? Millions? Billions? Trillions? Even that will only be sufficient if you hold it in the strongest currency.
Most people think of the cumulative amount they would like to have to cover their expenses/needs/ wants and come up with some figure (say 500,000 $ ) and then spend their life chasing that amount in their bank account.
Let's take a look at it from another angle!
How much money will you need every month when you retire? The best way is to come up with an Annual Budget for your retirement year that includes your basic expenses, luxuries you want, vacations you want to take, medical expenses, gifts, emergencies, etc. And then, divide it by 12 to come up with the monthly amount you need to live that comfortable retirement life. Let's say 5,000$ per month.
There are three ways to fund our retirement.
- Active Income: You keep working at some job or service and get a regular salary
- Savings: You have saved a substantial amount and taken out some portion every month.
- Passive Income: You get this through incentives, rents, interests, royalties, etc., regularly.
Which one do you prefer?
Each one has pros and cons.
If you resonate with person A in our earlier story, retirement will remain a mirage, a distant dream which will never see the light of day.
You will have to continue working for active income, even in retirement. That's person B in our earlier story.
With savings, you always have a risk of running over it while you are still alive. That's person C in the previous story.
For passive income, you need to invest time and effort to increase your financial intelligence and build those multiple income streams. But once you build it, it will be there forever for you and hopefully for the coming generations.
Once you get 5,000 $ in passive income, you can retire if you choose. That's person D in the story.
Which one do you think is easy to chase? 5,000$ per month or 500,000 $ in savings or lifetime work?
Again everything is correct! Everyone has different ways to tackle the same problem called retirement, based on their knowledge, experience, capability, and willingness!
Which one do you resonate with and are willing to work on?
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