When I talk to friends and family about money, reaching financial independence and retiring early, one argument that comes back often is:
“We’re not like you”
Or its variants:
“I couldn’t change jobs”
“You are smarter”
“For you it is easy, but not for me, I am average”
I know you can’t change people who don’t want to change, but gearing up for an average life is dangerous. I hope you don’t wait until you’re 55, with no money saved up for retirement and a $1,500 a month job to hear me out.
We live in a society that promotes the cult of average. Making good money is taboo. You have to live like your peers, take a huge amount of student loans, buy a house roughly the same size, and have 2.3 children. I actually think being average is a bad thing.
What your average retirement looks like
Getting average grades in college will set you up for an average job, and if you never question the status quo, an average retirement. And it doesn’t look great.
The median income in the US is around $54,500 (2015 numbers). That means half of the American households (not individuals) make less than that. The average savings rate is just over 5%. Saving 5% of an average income, or $2,700 a year from age 25 to 65 will allow to retire on a $167,055 nest egg (calculator used), if for once, you were above average and invested in a high interest saving account at 2%. That will barely allow you to keep up with inflation though.
If you want said nest egg to last until you die, you will be able to withdraw only $6,682 a year, or $556 per month. Add to that the average Social Security retirement check of $1,287, provided such a thing still exists 40 years from now, and you are looking at a retirement income of $1,843.
Not bad, but I sure hope you will have finished paying your mortgage by then. And will never get sick, or need terminal care. And that you’ve already had kids, or that they won’t need support for college or anything fancy. I hope you don’t like to travel, play golf, or take your family out for diner.
And once again, that is if Social Security still has your back 40 years from now, otherwise on $556 a month, I hope you’re ready to relocate somewhere really cheap, or happy to eat dollar store canned soups for the rest of your days.
Breaking out of average
You have three ways to break out of average:
- Become an above average saver
- Become an above average earner
- Become an above average investor
Since you’re not making a ton of money as of today, let’s just go over the saving part quickly, and try to stop comparing to our average friends, and the things they buy they don’t really need.
The dollars you spend on stuff are after tax dollars, meaning you actually need to earn about 40% more than the cost of the item to afford it. Just leave the money in your account and we’ll find a good use for it.
Don’t worry about what people say, just picture yourself enjoying retirement while they’ll have to wait until age 70 to retire, if ever.
Focus on your earnings
Your best leverage is to start earning more money.
Yes, it is hard to do, and it takes time. But a one time $10,000 raise at age 35 means $300,000 more earnings over the next 30 years.A one time $10,000 raise at age 35 means $300,000 more earnings over the next 30 years. Click To Tweet
Now we’re talking. There are many ways to earn more money.
- Be the best employee you can and ask your boss for a raise
- Shop around for a similar job that pays more
- Do the strict minimum at work and start a side hustle
- Freelance in another field
- Teach or tutor in your field or your passion field
- Take a night class or an online course to improve your skills and get a raise (find free courses or ask your boss to pay for it)
Make your money work HARD for you
Becoming an above average investor is not as complicated as it sounds. You need to make your money work HARD for you.
While investing the $2,700 average savings at 2% per annum only gives you $167,055 after 40 years, finding returns of 8% (which is under the market’s average long term return) will drastically improve your retirement pot to $796,669.
Once again, you have a few hacks. Here are ten to get started.
1. For an instant 100% return on your investment, take your company match and fill your 401k.
2. Keep filling it since you also get a tax saving.
3. Focus on all other tax deferred or tax free savings accounts you qualify for.
4. Invest in low fee index funds thanks to a low cost broker or robo-advisor.
5. Keep a little buffer in an instant access savings account. Once you start making your money work harder, it is painful to see idle cash sitting there, but it is better than having to sell low in an emergency.
6. Make sure you look every year for the best deal in both brokers and high yield savings accounts (if you’re not getting at least 1% in your savings account, consider switching to a bank that actually pays you to save).
7. Pay yourself first. Have your savings disappear from your paycheck on the same day the money hits your account.
8. Forget about your accounts. Studies found out even fund managers have a hard time beating the market. So just let your accounts sleep and grow while you focus on making more money.
9. Find more sources of income. Such as real estate (that can be fully passive with REITS or hands on with flipping or rental properties), an online business, etc. While some of these income ideas may have a higher learning curve and higher risk, you may get better returns on them.
10. Borrow only to build wealth. Don’t get into debt for anything other than a manageable mortgage, on your main or rental property, or to invest in something else. Debt will cripple your wealth building efforts.