If you live in Los Angeles or the surrounding area, you may be counting down the days until you can stop working and start looking forward to retirement. But how do you best plan for it when we’re busy spending more money than many Americans on housing, food, taxes — even entertainment? When should you start planning for retirement? Should we begin earlier than others?
In this post, we’ll provide some tips on the best way you can get a jumpstart on your savings and investments to make sure the later years in life are truly golden.
How much money do I need to retire in LA?
Well, that depends. Of course, you’ll want to take your current lifestyle into account, but that’ll probably be difficult to do if you’re in your 20s or 30s, or you’re still planning to have children, or you want to travel the world. Do you still have student loans to pay off? And what about that mortgage? Surely, there’s a lot to consider, and planning — frequent check-ins with your financial planner or even a free online budgeting app like Mint.com — can take away some of the stress that may nag at you from time to time, or even every day.
In terms of how much money you’ll need to retire, the AARP will tell you that $1 million is a good goal to aim for. But how reasonable is that?
According to GOBankingRates, not very reasonable — at least in California.
The personal finance site compared how long a $1 million nest egg would last in each state based on average expenses for people age 65 and older, including groceries, utilities, housing, transportation, and healthcare. Based on average expenditures, California fared the worst out of the lower 48 states; it was the only one where $1 million would last less than 17 years.
Your retirement dollar will last longest in Michigan, at 26 years and 4 months. And, if you guessed that Hawaii was the worst place to retire, you are correct. Your $1 million will last you just 11 years and 11 months there, whereas in California, the second-worst state for retirement, it’ll last 16 years and 5 months. If you retire at age 65, that means you have enough money to get by until you’re 81.
However, the average retirement age, according to GoBankingRates, is 63, with life expectancy up to 85 for retirees. That means 22 years of savings is needed. That’s leaves Californians more than five years short with a $1 million nest egg.
So, does it come down to earning more money before retiring, or retiring later? Or — gulp — never?
How can I save money for retirement? Is early retirement possible?
A few basic rules exist for saving money in general, but particularly toward retirement. You’ll want to make sure you minimize your debt, take in more money than you spend each month, and smartly invest any retirement funds based on your age and income. If your employer sponsors a 401(k) plan, for example, you’ll want to try to contribute as much to that as possible, especially if there is a match.
It’s never too early to start saving for retirement, but how early is too early to retire?
There are a couple of cool tools out there that can help you figure out if retiring early is possible. In L.A., it’ll be hard to do, but depending on how much money you make and how early you start saving, it can be done.
Your savings rate will help you determine when you can retire: Subtract your spending from your income after taxes to figure out how much you are saving, then divide this number by your income (also after taxes). Multiply that by 100, and that is your saving rate.
Some people also rely on what’s called the “4 percent rule,” which means if you can withdraw 4% from your retirement profile each year to live off of, you have enough money to quit your job and retire early. For example, one Minneapolis 26-year-old built up $150,000 in savings and plans to retire by age 37, living off $30,000 a year.
Sound complicated, or already scared you’re not saving enough? This chart breaks down easily how close you are to early retirement based on a few factors: how much you save each month and your after-tax annual income. It assumes that you start with nothing in savings, have a 7% annual growth rate, and your lifestyle will stay the same in retirement.
If you save and invest $200 per month toward retirement and make $25,000 per year after taxes, the lowest amount on each end of the chart, you’ll be financially independent in 42 years. But if you save the maximum of $6,000 per month and make $95,000 per year after taxes, you’ll be financially independent in just seven years.
A few interesting observations from the financial expert who made the aforementioned monthly savings grid:
- If you increase your monthly savings from $200 to $400, no matter how much you make per year, you’ll be able to retire 10 years sooner.
- If you’re in your 20s and you make $50,000 per year after taxes and save and invest $1,000 per month, you can retire by your late 40s. Increase that to $2,000 per month, and you can retire by your mid- to late-30s.
See also: Tips for Getting Your Savings on Track
Investing and saving early will certainly help you to ensure you have enough money for retirement, but there are other strategies to keep in mind as well. It’s important to determine not only how much you save, but HOW you save and invest. One way of thinking about this is called the “bucket strategy,” which allocates your savings based on when you will need to access the funds: now, soon and later. Typically the “now” bucket will be funds that you access within the first few years of retirement – this may be money in the bank and will cover any immediate living and medical expenses. The “soon” bucket refers to assets that you will access during the first ten or so years of retirement. This money should be invested with the goal of lower risk, moderate growth. With these two buckets in place, you can also think about a third “later” bucket that allows you to invest in assets that will have higher growth potential, and longer term commitments. While this approach may not be right for everyone, it can be a good way to think about diversifying your assets for access at different times in your life.
Is an LA retirement possible? Should I consider retiring elsewhere?
Keeping in mind all of the above numbers, you’re going to definitely want to account for cost of living in California and how comfortably you can save money now and later live on throughout your retirement. The Minneapolis Millennial’s retirement dream probably won’t work for you on $30,000 per year in L.A. Similarly, saving $1,000 per month when you make $50,000 per year after taxes over a 20-year period is going to hurt if you live here. Some of the main categories to consider when determining the amount you need to retire include groceries, healthcare, housing and transportation. On top of this, add a premium for comfortable living, or any indulgences in lifestyle that you know are part of your habits.
When considering retirement spending however, few people spend a fixed amount over the course of their retirement. Often times, new retirees spend more early on than they do in later years, as they may travel and engage in more activities up front. There are certainly benefits to remaining in a community that you have been part of for much of your life.
If you don’t think Los Angeles is your scene anymore, there’s always escaping to another state or even country. Perhaps you’d like to live where your dollar can stretch a bit more.
International Living ranks and rates the best retirement destinations in the world. From Colombia to Costa Rica, if there’s something you felt your adventurous heart missed out on in your younger years, you’d be in luck picking up and setting sail for a new abode — and having the money to do it.
Top of the list of places to retire in 2017? Mexico. More than 1 million Americans call Mexico home and get by on just $1,200 a month. Mexico also has first-rate hospitals, plentiful retiree benefits, and, like L.A., year-round weather that’s perfect for snowbirds.
And you wouldn’t have to travel too far to get there.
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Barry Edward Borowitz is the founding partner of Borowitz & Clark, LLP, a leading bankruptcy law firm that represents clients petitioning for bankruptcy protection under Chapter 7 and Chapter 13 of the bankruptcy code. Mr. Borowitz has been practicing bankruptcy law exclusively for more than 15 years. View his full profile here.