Workable Wealth Blog | Financial Education and Resources
You are in control of your financial education. Let us ditch the fancy lingo and start learning about money in a way that is fun and relatable. Fee-only financial planner based in San Diego working locally and virtually across the country helping young families, professional and entrepreneurial women, and military families.
Buying a rental property is an exciting idea. Many popular bloggers, podcasters, and HGTV show hosts make it look so easy – but is it really?
In the world of Pinterest and Fixer Upper, home renovations and rentals seem easier than ever. Unfortunately, that’s not usually the case. The cost of a home renovation and the stress of renting it out to short or long term renters often makes the process a financial (and emotional) loss. Let’s look at what you need to consider before moving forward with a rental property purchase.
#1: Who’s Responsible for Upkeep?
If you’re renting out your property to short-term vacation renters, you’ll need to consider who’s going to clean your property and get it ready for guests in the turnaround time you have between departures and arrivals. If you’re renting out your property to long-term tenants, you still need to have a contractor or maintenance company on-call who can help you take care of the property if something goes wrong. Sometimes, landlords are able to outsource these tasks in an affordable way (but keep in mind, the more you outsource, the more of your profit you’re giving away), which leads us to the next item to consider:
#2: Will You Make a Profit?
This is easily one of your biggest considerations. It’s easy to assume you’ll make a profit when you ballpark the numbers and only look at the best-case-scenario. Don’t do this to yourself. You don’t want to purchase a home under the assumption that you’ll turn a profit by renting it out, only to be surprised by a few unexpected expenses and a slow renting season. Before you buy, do the following:
Evaluate the local rental market
Know what you expect to spend both to purchase the property and to maintain it
Estimate how long it will take you to actually turn a profit or make back what you’ve invested
#3: How Will This Impact Your Taxes?
Being a landlord comes with a different set of tax expectations than just being a traditional homeowner. Make sure you include property tax estimates, as well as income tax on your rental income, in your financial projections. High property taxes could offset any revenue you bring in from the property each year. As a landlord, you also have a set of tax deductions you may be able to take advantage of. While you may have a positive or break-even cash flow situation, by factoring in depreciation, you could have a tax loss each year. Speaking with an accountant and financial planner to understand the numbers and what you need to do to remain organized for filing season is in your best interest.
#4: Do You Have the Right Insurance?
As a landlord, you’ll need to decide what type of insurance coverage you’ll need for your investment property. Although sites like Airbnb and VRBO both have some insurance protection for their hosts, your insurance company could potentially deny you coverage if they find out the property is being used commercially. You’ll also need to weigh the pros and cons of taking on a higher monthly premium that offers you broader coverage as a landlord versus skimping on coverage but having a high deductible. Note: As a financial planner, I’m going to go ahead and tell you to get the landlord insurance. Don’t take unnecessary risks here.
#5: Do You Have an Expanded Emergency Savings?
It’s beneficial to calculate the costs of replacing or repairing a few of your property’s big-ticket components. Think of worst-case-scenarios, then call around for estimates. A few worth looking at are:
Plumbing (nobody wants a burst pipe or an out-of-service toilet, especially if you’re a renter)
Replacing major appliances if they go out
Knowing what some of these costs might be ahead of time can help you to set a reasonable savings goal. That account should be earmarked specifically for rental property expenses to help you avoid going into debt if you’re faced with an emergency.
#6: Are You Emotionally Ready to Be a Landlord?
Most people assume that renting out their property will be easy. In many cases that might be true, but life happens. Sometimes pipes burst in the middle of a holiday. Or your guest tries checking in after their flight lands late at night and can’t find the key. As a landlord or host, you need to be prepared to handle these situations in the moment. In some cases, you might find you can outsource this on-call duty to a property manager, but that’s an added expense you’ll need to keep in mind when deciding if this venture is a worthwhile investment.
Is A Rental Property Right For You?
Truth be told, for most people the answer to this question is a simple no. Rental properties are fairly trendy right now because of the prevalence of organizations like Airbnb and VRBO that make renting your home seem easy. However, for the majority of people, this investment just isn’t one that makes good financial sense. Rental properties can be time consuming, and often are more costly than they’re worth in potential revenue. However, there are a few cases where a rental property might work for you. I always tell clients you need to check four items off your list before moving forward with purchasing a rental property:
1. A financial plan that supports the property purchase and ongoing costs. This means you’ve estimated insurance, taxes, cost for upkeep and cleaning between guests or tenants, costs for updates, a sizable nest egg in case you need to do a major repair, and a down payment that offsets the financial burden of the mortgage.
2. Knowledge of the area. Purchasing a rental home in Hawaii when you’re landlocked in Nebraska probably isn’t in your best interest. It’s better to buy in your local area, or another area where you have a wealth of knowledge about the local real estate and rental market. You need to make sure this investment is going to turn a profit, and that means that property values have to be consistently on the upward trajectory and the rental market hasn’t experienced a slump in a while.
3. A purpose for the home. Do you want a rental home because it sounds like easy money, and you’ll have a cool place to vacation? That’s likely not a good enough reason. Purchasing a rental property means having a long-term strategy for the revenue. Are you using it to reach a savings goal? Or to invest? Are you planning to spend time on the rental property, or is for tenants only? Will the home require a lot of upkeep as the years go on? Do you have a solid exit strategy for when you’re done being a landlord? Having a purpose when purchasing your rental property and knowing your strategy going in is a must.
4. Time. Rental properties are a huge time commitment. The initial search and purchase, renovations to get the property renter-ready, ongoing maintenance, and renter interactions – all of these things are time consuming. I always tell people that if you’re not willing to get up in the middle of the night because someone has called about a pipe bursting in your rental property, you’re not ready to purchase one. Always go into rental property purchases knowing that they’re a time commitment, and make sure the return on your investment is worth the time you’re spending.
Are you considering a rental property? Don’t dive in without knowing whether or not it works for your unique financial situation. Let’s chat about whether a rental property will help you achieve your goals, or if there’s a different and better solution out there.
There’s a lot of talk in the world of personal finance about the importance of having multiple income streams. On a high level, having multiple streams of income helping you reach your financial goals sounds pretty great. However, it can be tough to know where to start – especially if you’ve only ever worked a traditional 9-5 job. When you start building a strategy for creating different income streams, it’s important to know a few different things:
1. Why these different streams of income are important, or what goals they’re going to help you achieve
2. What types of income streams are available to you
3. What types of income projects make the most sense for you and your family
As always, the most important thing on this list is your why.
Why Should You Have Multiple Income Streams?
For most people, the income they receive from their full-time job is enough to cover most of their budgeting basics. Some months may be tighter than others, but they often feel stuck because they’re not sure how to consistently live more comfortably without asking for a raise every 3-6 months. This is where having multiple streams of income can help.
Developing different streams of income empowers you to reach your goals more quickly, protects you against the possibility of losing one income stream, and helps you to grow your wealth for the long-term. All of these things can be part of your why for developing multiple streams of income, but you should also think through tangible reasons and benefits that are relevant to you.
For example, are you looking to grow your cash flow each month to travel more? Do you want to use the extra income you’re earning to save for your child’s college education? Are you working toward a short-term savings goal, like a home purchase? Do you have a hefty debt load that you want to pay off ASAP? Knowing your unique “why” will help you to stay motivated, even when building multiple streams of income feels overwhelming or tiring.
If you’re single, your primary income is the only primary income you have to think about. However, if you and your partner share finances, one of you likely acts as the “breadwinner.” Many of my clients are women and are also the breadwinners in their families, but that’s not always the case. Regardless of who the primary income is coming from, the income itself usually checks a few boxes:
It covers all or most of your expenses
It’s a W-2 income, or a steady income from self-employment
It’s the most reliable of your income streams
Primary income is usually the paycheck that comes from your full-time job every other Friday. The benefits of having a steady primary income are that you can typically always count on it as a baseline for your budgeting and financial planning. However, if you’re 100% reliant on your primary income, you run the risk of financial instability if you should ever lose your job or become unable to work.
Many people look to increase their passive income first, for obvious reasons. Our full time work can be exhausting. When we pile on all of our other responsibilities, there aren’t very many hours left in the day to grow multiple, active income streams. Figuring out how to incorporate passive income into your financial plan is one of the best ways to start increasing your cash flow and growing toward your goals. However, not all passive income is created equal.
The Passive Income Myth
The idea of passive income is incredibly appealing for most people. In today’s world with increased access to resources and tools through Pinterest, podcasts, different blogs, and social media – there are hundreds of thousands of people out there selling the idea that they’ve “made it” overnight using passive income strategies. They might be promoting their recent blog, their sponsored podcast, or an affiliate program they’re participating in. There are two things to keep in mind here:
1. Nobody is an overnight success.
2. The “passive” income strategies they’re promoting usually aren’t 100% passive.
The truth is that passive income takes time in the vast majority of cases. Building a blog, selling affiliate courses, or selling an online product or services requires a big investment of time up front. With time, that investment can start to pay off, with minimal ongoing work from you. However, on the front end, these are definitely not “passive” income streams.
Interest and Dividends
One of the only true ways to earn passive income is to grow the money you currently have through investing. Dividends are the share of the profit you bring home as the part owner of a company (which you are when you purchase stock). Interest, on the other hand, is money you earn on a loan you give to a company. When you buy their stock, you’re technically loaning them funds, and those funds earn interest over time. Investments that earn interest, or pay dividends, tend to grow. The key is spending time in the market, and investing for the long-term rather than seeking a quick pay out.
Although you may need to spend some time up front coordinating your investments or working with a financial planner who manages them for you, adjusting your portfolio quarterly or annually to stay on track to meet your goals is by far the least time-consuming of other so-called “passive” income strategies you could pursue.
Many additional income streams that people choose to incorporate into their financial plan are relatively active. Although the revenue might be recurring, these revenue models require work on your part. How much work you’re willing to pour into these active income streams is entirely up to you! Some will require more than others, and some will be more enjoyable for you than others. Typically, I recommend that people pursue active income streams that energize them. This is especially true if you’re already working full time and have a limited amount of hours in a day to dedicate to this secondary income stream.
The “Side Hustle”
Most people who are pursuing an additional stream of income pursue a side hustle. This side hustle is a job or freelance work that you take on in addition to your full time career. In many cases, people’s side hustle evolves into their full time job, especially if they pursue something they’re passionate about. I’ve seen side hustles take many different forms. A few ideas might be:
Starting a monetized blog
Growing your social media presence and promoting products through affiliate programs
Selling a course or online product
Repurposing items and selling them for a profit on Facebook Marketplace, Craigslist, or eBay
Picking up freelance writing, editing, or graphic design work
Dog walking and pet sitting through the Rover app (or by advertising around your neighborhood)
Selling handmade products through sites like Etsy or in-person at your local farmer’s market
Purchasing a rental property and becoming hosts on sites like Airbnb or VRBO, or renting it out to long-term tenants (remember: this is a lot more labor-intensive than it sounds)
Side hustles can be tough work, but if you pursue work that you love doing, it will help keep you motivated even when you’re feeling the strain of working in addition to your full time job.
Adding Income Isn’t the Only Way
Although having multiple streams of income can help you achieve many of your financial goals, it isn’t the only way to free up cash flow, build your savings, or pay down debt more quickly. In fact in some cases it makes more sense to find ways you can cut expenses rather than burn yourself out trying to grow your income. Everyone’s situation is unique, which is why it’s so important to create a comprehensive financial plan that puts you on track to meet your goals without totally sacrificing a comfortable lifestyle, your values, or time with the ones you love.
Members of younger generations, from Gen X to Gen Z, are worried about retirement, and with good reason! Right now, only 60% of workers are actively contributing to their workplace retirement savings account. While today’s rising economy has freed up the cash flow for many employees to start contributing more than they have in the past, that doesn’t mean everyone is on track to have enough saved by the time that they retire.
When I talk to people about their retirement savings strategy, the question of Social Security is almost always raised. Nobody is exactly sure how the program works, how much they can expect to receive when they retire, and whether or not they’re going to be able to count on it at all. The good news is that Social Security likely will play a role in everyone’s retirement income. How big of a role, on the other hand, is somewhat up in the air.
How Does Social Security Work?
Social Security was established in 1935 by the Social Security Act. Essentially, the program is designed to help America’s senior citizens and retirees stay financially stable after they leave their full-time jobs. When we’re employed, we pay into Social Security through the taxes that come out of our income each paycheck. A total of 12.4% of your income is contributed to the program – 6.2% is contributed by you (removed from your paychecks), and 6.2% is contributed by your employer, (so for my self-employed readers, you’re paying both sides of this).
Right now, the Social Security administration reports that $0.85 cents of each dollar that’s contributed to Social Security is directly contributed to a trust fund that pays out benefits to retirees and other Social Security program participants. That money adds up over time, and is used to calculate what your annual or monthly payout will be once you retire. Essentially, the longer you’re able to stay in the workforce to contribute toward Social Security, and the longer you delay taking Social Security during retirement, the higher your payout will be.
Many people plan on Social Security for at least a portion of their retirement income. Currently, the average Social Security payout is just over $1,400/month for people who enrolled in 2017. While that isn’t enough to cover all of your expenses during retirement, it’s still a notable amount to supplement any additional savings you’ve grown over the course of your career. However, many people are starting to wonder whether or not Social Security is sustainable, and very few people in younger generations are counting on the program to give them as large a payout as it currently provides to retirees.
Will Social Security Go Away Before You Retire?
Social Security’s cash flow has been negative since 2010. To continue to pay out benefits to Social Security recipients, the government has been using interest on its Treasuries – but that’s not a sustainable solution.
As of right now, the federal government has estimated there is enough saved to pay out benefits to all retirees through year 2035. With the baby boomer generation slowly moving toward retirement, the fear is that there will be too many people enrolled in Social Security, and not enough people contributing to the program to make it last.
This leaves only two options:
1. More money needs to be paid into Social Security.
2. Less money needs to be taken out of Social Security.
To accomplish one (or both) of these action items, the government can either raise taxes on current members of the workforce to pay more into the program, or it can reduce benefits for future Social Security enrollees. Neither of these options is a great solution for people with a long period of time before they retire. Although it’s impossible to say for sure, most economists believe that we’ll probably see a combination of increased Social Security taxes and lowered benefits.
Right now, there’s nothing that indicates that the government would do away with the program altogether. It’s been a relatively successful program, and helps to encourage Americans to stay in the work force and contribute to society for an extended period of time. That being said, you shouldn’t base your entire retirement strategy around a potential Social Security payout.
What Role Does Social Security Play in Your Financial Plan?
Social Security isn’t a fail-proof retirement income strategy. Especially if you’re age 40 or younger, it’s tough to say exactly how the total benefit calculation will be adjusted over time. Typically, when I talk to clients about retirement savings, I try to simplify things: focus on what you can control.
Your retirement savings, your investment portfolio, the time you spend in the market, and the amount of funds you contribute over the years are all in your control. When you choose to take Social Security is also in your control, and sometimes delaying your payout can help to increase the total benefits you receive month-to-month. However, the Social Security program itself is completely outside of your control. All you can do is continue to contribute and hope for the best. Instead of focusing your energy on worrying about your Social Security benefits, focus your energy on contributing to your retirement savings accounts and investing wisely.
If, for some reason, economists are wrong, and the way the Social Security program is operated is dramatically changed in coming years so that everyone continues to receive sizable benefits for decades to come – that’s great news for you! You’ve already done your due diligence to create a savings strategy and retirement income plan, and receiving Social Security benefits will only increase your cash flow and add to the funds you have available to live a fulfilling lifestyle as a retiree. Any benefit you receive from Social Security should be viewed as icing on the cake.
You probably don’t have to worry about whether or not Social Security will be around by the time you retire. My thoughts are that it will be around, but in a reduced form through smaller payments or an increased retirement age, but that’s not what you should be basing your financial strategy on to begin with. Create a savings plan that puts you on track to reach your retirement income goals and affords you the lifestyle you want should be your first priority. Any additional retirement income you receive from Social Security will be welcome if and when it comes.
You bury yourself in personal finance books and comb through online communities full of people like you, whether they’re frugal parents, financial-independence seekers, aspiring real estate investors, or any other type of person looking for strategies to grow wealth.
There’s no doubt you’re motivated and you’ve been working hard to improve your money management habits. You’ve probably made a lot of progress on your own, too!
But there’s just one problem: you’ve reached a point where you really need more help to get to the next level… and your significant other is not on board with hiring a financial planner for your family.
What should you do when you know you need financial help — but your spouse doesn’t see the value or simply doesn’t want to talk with an outside money expert?
Start by Hearing Their Concerns
The truth is, your partner could have valid concerns about reaching out and asking for financial help.
They could have had a bad experience with someone who oversold them life insurance or a terrible annuity. Your spouse may not know as much as you do about the financial advice world, and doesn’t feel confident about finding a planner to work with that they both like and trust.
Or maybe they just don’t feel comfortable opening up to a stranger about their money.
Whatever the reason, it’s going to make perfect sense to your significant other even if you don’t think it’s rational. Don’t dismiss their concerns. Listen first. From there, you may be able to answer their questions or share resources with them to alleviate worries, fears, or doubts.
If your partner doesn’t have specific concerns, but just doesn’t see the value in getting financial help, it may be more on you to do some initial legwork. If it’s important to you, do the preliminary research and then come back to your spouse with some specific options.
For example, instead of saying “I think we should get a financial planner,” and leaving it at that, do some digging and make a short list of 3 advisors you’re interested in — and explain to your partner why you picked those 3.
They may be more receptive to the idea of getting financial help if it doesn’t feel like such an overwhelming chore — and if they understand what they can expect before making any decisions.
Focus on Their Motivations
Getting financial help and then working on all the to-dos around your money that a financial plan sets out for you — budgeting, saving, investing, getting proper insurance policies and estate plans; the list goes on — isn’t exactly fun for most people.
It feels amazing to get your finances under control and make progress toward building wealth. But if you’re staring down the start of this process and have a lot of work to do to move from where you are to where you want to be?
That’s tough. It’s intimidating. And people are unlikely to do it just for the sake of doing it.
If your partner is reluctant to get a financial planner (or just doesn’t want to get on board with working your wealth together), they may just lack a good reason why. In other words, they might not have the same motivation you do.
To get their buy-in, you need to consider what does motivate them. What’s important? What makes hard stuff worth it for them? What kind of outcome would make them interested in taking action to get to it?
If your spouse has a business idea they’d love to explore because they want to quit their day job, for example, that could be excellent motivation for taking necessary actions together to increase your household financial stability so they can pursue entrepreneurship.
Forcing someone to do what they don’t want is a losing game. But talking about what motivates each of you could be a gamechanger.
Consider Your Options
Not all financial planners are the same or created equal — but if your partner doesn’t know that, they may be very reluctant to get on board with the idea of asking for financial help.
They may have one idea of what a “financial advisor” does, but they may have no idea how many different types of planners are out there. There’s a difference, for example, between someone who is “fee-only” and someone who earns commissions selling products.
There’s also a big difference between advisors who will only work with you if you have a million bucks in the bank and those that offer comprehensive financial planning advice without requiring you to let them manage your money.
If your spouse doesn’t know this, they may not be very keen on getting financial help. Be sure to let them know they have plenty of options — including what specific kind of support they receive.
You and your family can get the kind of help you need, which could range anywhere from a quick consult to an ongoing relationship that lasts years. Here are just a few of your financial planning options:
A one-time meeting for a deep dive into a specific area
A one-time plan that may come with several meetings, but with a specific end date and deliverable (in the form of your financial plan that you can then take and implement)
An ongoing relationship where you get access, accountability, and guidance from a financial professional who’s available via email and through scheduled meetings to put you on the right track — and keep you there
An expert who can help you manage your investments or make smarter investment choices if you need advice in that area
Find the Right Time to Start the Conversation
No matter what your situation, you need to talk to your significant other about getting the financial help you need to work your wealth. You’ll need to hear their concerns and questions, and you might need to do some work in getting them answers before they agree to move forward.
But you also need to consider the timing of that conversation. Don’t badger or nag them about it the minute they come home from a stressful day at work; don’t get into a situation where you need to shout over your screaming toddlers about making the decision.
And finally, don’t make accusations or threats. Your finances are extremely important and it can be stressful when you’re on board with making necessary changes but your partner isn’t — but instead of blaming them for that or accusing them of something, consider sharing why this means so much to you.
Share what motivates you, and what you hope to accomplish if you can better your family’s financial situation. Explain why you would appreciate the support and expertise of a professional (and objective!) financial planner who can give you more confidence and clarity around money.
Seeing your passion, drive, and motivation to help your family to a better financial place may be all your partner needs to get on board with the idea of seeking financial help.
That number is likely higher when you consider households where both women and men work and she earns more (but doesn’t have children; that 42% only counted moms).
While there’s absolutely nothing bad about making more money, you might have some unique challenges to face or consider when you make more than your spouse. Here’s what to think about (and how to handle both your finances and your feelings).
How to Work Your Wealth When She Makes More
There are some specific things you should consider for your finances when your work brings in more money than your spouse.
First, make sure you take care of your own retirement savings. Some research suggests that women save half as much as men (because they feel more obligated to take care of others before addressing their own needs), even though women usually live longer.
That’s a bad combination that can set you up for failure in your later years. Take advantage of a 401(k) if your job provides it.
Then, you might want to look into a spousal IRA — especially if your partner is a stay-at-home parent who doesn’t have an employer. Spousal IRAs allow husbands or wives to save (tax-efficiently) for retirement in a Roth or traditional IRA if:
You’re married and file taxes jointly
Your partner has zero income of their own
Your income equals or exceeds their contributions to the account
Finally, if it’s possible, use some of your high earnings to purchase some more time or peace of mind for yourself. Think outsourcing unpleasant or time-consuming tasks like house cleaning, laundry, or grocery shopping and meal prep.
Why? Because numerous studies show women still do the bulk of household chores even when she’s the breadwinner in the family. In fact, one paper The Guardian looked at reported this depressing fact:
Dig deeper into the numbers, and things look worse: according to some studies, in heterosexual households where the woman is the main breadwinner, the more she earns, the less her partner will contribute to the housework.
As a breadwinning woman, you work hard enough when you’re at work. You shouldn’t need to manage second, third, and fourth jobs as full-time house cleaner, nanny, and chef on top of all that.
Get Your Money Mindset Right as a Breadwinning Woman
These financial considerations are just one part of handling your household finances when you’re the breadwinner in the family. There’s also the mental and emotional side of things — and they can get a little weird.
But before we dig into that, let me begin by saying your money mindset should be super positive! Being a breadwinning woman is something to celebrate because it’s an accomplishment.
Just consider some of these stats about the gender pay gap you’ve had to overcome to become a breadwinning woman:
Still, it can feel hard to feel celebratory about how much you’ve overcome if you’re driven to succeed because of something like a scarcity mindset (or worrying you won’t have “enough” money).
Fearing you won’t have enough or that you’ll run out can seriously motivate you to earn more — at least in the short-term. In the long-term, it’s a sure way to feel perpetually exhausted, negative, stressed, and anxious about your money. If this is where your mindset is now, try:
Knowing what’s actually going on with your finances. This means you need a budget that tracks your spending, an overall financial plan, and an investment strategy so you’re aware of the reality of your money. If you’re only guessing, you’ll probably always be afraid because the unknown is scary!
Developing clear action steps. Goals and plans are one thing. But do you know how to reach them? Getting very specific about what you need to do with your money to create the life you love can help you feel more confident about actually making it happen. (If you don’t know where or how to start, click here.)
Honestly assessing your money “scripts” or stories. What do you tell yourself about money? What do you believe about people who have money (or who lack it)? What does your income mean about you as a person? Be honest about your answers to these questions — and then realize that these are just stories. They’re subjective, not reality, and if they’re not serving you it’s time to replace them with scripts that empower and motivate you to work your wealth instead of feeling badly about it.
But what if your own mindset is no problem — and it’s your spouse that struggles with the idea of you making more?
Getting on the Same Page with a Spouse Who Makes Less
Your spouse may feel all kinds of ways about you earning more — and those ways likely have nothing to do with you and everything to do with how they feel about what their role in your family “should” be.
If your spouse saw being the breadwinner as part of their identity, your new position as breadwinning woman can feel like a serious conflict or even a threat.
And no, it’s not your job to get your spouse to work through these feelings, emotions, or conflicts. But you can be empathic, understanding, and supportive — by helping them:
Find an objective third party to work through those internal thoughts or emotions with. That might be a therapist — or maybe it’s just a good family friend who as your best interests as a couple in mind and can provide an outlet for your spouse to have someone to talk to.
Do what makes them feel more “masculine” — or just more valuable and helpful. If there are “manly” chores, get out of the way and let your spouse do them. Don’t try to micromanage or just do things yourself. Let your partner take full responsibility for the tasks you both decide are theirs to handle.
Work on your finances like the team you are. Have monthly money dates, attend financial planning meetings together, and make financial choices around big decisions and long-term goals together.
What you don’t do can be just as important as a form of support for your spouse. Obviously, you don’t want to use your higher income as leverage in your relationship — or make your spouse the butt of any stay-at-home parent jokes.
Even though it may be tough (especially if you’re tempted to just shake your husband and tell him “oh stop being ridiculous and be happy our household has this kind of income!”), the best way to approach a spouse who struggles with the idea of you making more is with empathy.
Wondering, “how much do I need to retire?” It’s a good question, especially if you’re in your 20s and 30s. When you’re younger and earlier on in your career, you have plenty of time to think about what you want and then develop an action plan to actually make it happen.
But it’s also a tricky question because there’s no one right answer. What you want and when you want it will make the right steps for you to take look much different than what the person next to you needs to do to reach their goals.
This is where planning for or thinking about retirement can get overwhelming, and fast. There are just so many variables and options to consider!
That’s part of the value of hiring a financial planner who can figure this out with you. We’re trained to take complex questions like this and explore all the options so you get the best answer for you.
If you don’t have a planner, don’t just throw up your hands and give up on figuring out how much money you need to retire (or hit financial independence). You can at least begin the process of answering the “how much do I need to retire” question on your own by leveraging a few rules of thumb that will guide you to a specific number.
Here are 5 to try out and apply to your situation.
The Rule of 72
The Rule of 72 can help you understand the compounding effect — and may even motivate you to save more, now, so you can compound your money faster.
This math shortcut shows you how long it will take your money to double, based on the return you earn in your portfolio. Let’s say you expected to earn a 6 percent return. You would divide 72 by 6, which is 12.
In other words, if you earn a 6 percent return, it will take 12 years for your nest egg to double.
This gives you some sense of how long it will take to build the wealth you need to achieve your goals. But be aware that this rule really only works if you assume return rates between 6 and 10 percent. Outside that range, the rule of 72 is less reliable.
The 4% Rule
This rule doesn’t tell you how much money you need before you can retire, but it will let you test your current portfolio value to see if you’ve amassed enough wealth to live off your invested assets.
The 4% Rule says you can withdraw 4% of this amount each year. This is the “safe” withdrawal amount, meaning you won’t run out of money if you only take out that percentage.
Let’s say you have $500,000 of invested assets. That means you can safely take out $20,000 per year and you can reasonably expect to not run out of money. If you can live off $20,000 per year, then you can retire right now.
This is another super simple guideline and can give you the quickest answer to the “how much do I need to retire” question. (It’s also related to the 4 percent rule!)
How much do you want to spend per year in retirement? Take that number and multiply it by 25. For example, let’s say you wanted to spend $75,000 per year. According to this rule, you’d need at least $1,875,000 to retire and fund the lifestyle you want.
This rule is really straightforward, but it makes one big assumption about something that is entirely out of your control: how long you’ll live after you retire. Using this rule means you assume your retirement — or the time between when you stop working and when you die — is 25 years.
With people living longer (or retiring sooner), retirements that last 30 or even 35 years aren’t out of the question… and enjoying the same lifestyle for a decade longer is going to require a lot more money.
This rule also doesn’t account for things like taxes and inflation — but that’s where things tend to get complicated no matter what rule you use. It can be a good starting point, but you’ll want to do some additional retirement planning to make sure you set your goal high enough.
The Multiply-Your-Salary Rule
Another way to multiply your way to an answer is to consider your salary and your age. This will tell you how much you should have saved through every decade of your life in order to be on track to retiring with enough money to live off of.
At 35, you should have 2 times your current salary in the bank. If you make $100,000, you should have $200,000 in your investment and retirement accounts.
At 45, you need 4 times your salary. If you’re making $150,000 at this age, your investable assets should be about $600,000
At 55, you’ll want to see 7 times your salary in the bank. If that’s still about $150,000 per year, you’ll need a nest egg worth $1,050,000.
The 10 Percent Rule
This rule isn’t so much about how much you need to retire, but provides a guideline for how you can get there. Most experts say that saving 10 percent of your salary over your working career will be enough to grow a sizeable nest egg by the time you’re in your mid-60s.
It’s good to have a rule of thumb that dictates how much of your income you need to save — but 10 percent might be a little low if:
You want to reach financial freedom earlier in life
You want to have more flexibility and choice with your lifestyle once you reach retirement or financial freedom (only saving 10 percent during your working years might mean living on a strict budget in retirement)
You don’t want to be forced to work into your 60s
You didn’t start saving until your late 30s or 40s
Instead, I’d recommend saving 20 percent of your income — at a minimum. You should aim to save and invest even more if you have more aggressive financial goals, like early retirement or financial independence.
How Much Do I Need to Retire? A Financial Planner Can Tell You
The point of all these rules of thumb is to get you in the right ballpark. It narrows down the vast array of possibilities to a more manageable guesstimate — but it’s still just that, a guess.
Until you sit down with a financial planner who can actually run complex projections with various numbers, you may never know for sure how much you need to retire without running out of money, or how much in investable assets you need to have before you officially reach financial freedom.
You’ve heard it over and over again as someone looking for good advice on growing wealth:
Contribute to a Roth IRA now when you’re younger, because you’ll probably be in a higher tax bracket later!
That could be true, because it’s reasonable to expect you’ll earn more as you advance through your career and gain more experience. The more you earn, the more you’ll pay in taxes, and Roths are helpful because the money you withdraw is tax free.
That means you’d pay less in taxes if you paid those taxes today on your Roth contributions (as opposed to other tax-advantaged accounts, like 401(k)s, where you don’t pay today but you do pay upon withdrawal in the future).
But “contribute to a Roth IRA” is not helpful advice at all if you can’t use a Roth in the first place. Roth IRAs come with income caps. For 2018, you can’t contribute to a Roth IRA if you’re single and your modified adjusted gross income is $135,000 or if you’re married and your MAGI is $199,000.
How to Get Around the Income Limits on Roth IRAs
Yes, there is. At least there is if you’re considering contributing to a Roth in the usual way (by pulling up your account and making a contribution).
But there are ways to get money into a Roth, even if you’re over the income limit… and there are also things to do with your money if you find you make too much to contribute normally.
Let’s look at how you can continue putting money into your Roth even if you make over $135,000 (or $199,000 as a married couple). That would be through a backdoor Roth conversion.
To do this, you’d contribute money to a traditional IRA, and then roll it over into a Roth IRA. This allows you to get money into a Roth even if you make over the income limit. There are pros and cons to doing this, and you’ll want to take into account the taxes you’ll need to pay on the rollover.
You could easily stash that cash in another investment account, like a taxable brokerage account. No, you won’t enjoy as big of tax advantage seeing as you don’t get a tax break here at all. But that may not matter so much when you consider the tradeoff.
A taxable brokerage account, on the other hand, allows you a lot more freedom and flexibility. You’ll want to invest here especially if you’re aiming for early retirement, so you can access your savings when you need to without facing fees for doing so before an official retirement age.
Most people don’t think of “budget” as anything but a bad word. After all, the idea of budgeting likely makes you think of cracking down, being strict on spending, and missing out on the fun stuff that just happens to cost money.
The thing is, being really restrictive can pay off. The more you reduce your spending, the more you’ll have to save and invest. And that’s the end goal, right?
Yes, but be careful. Budgets are like diets: the more restrictive you are, the more likely you’ll rebel. An overly strict budget can be the very reason why you inhale an entire box of donuts when you happen upon them in the office, or completely blow way too much money on an impromptu shopping spree.
Even though you know it’s not good for you, it’s hard to resist after you’ve been deprived. So is there a better way to budget that doesn’t leave you feeling deprived, while still allowing you to save enough and spend wisely?
The answer is yes, and it’s all about creating something sustainable and balanced. Here’s why you need to do it, and how.
Why Your Strict, Detailed Budget Doesn’t Work
I believe budgets are powerful, but there’s a better way to use a budget than as a way to severely limit yourself and what you can do with your money.
Even if you think you can “tough it out” or believe your financial goals will keep you motivated enough to avoid temptation, there’s an entire mountain of research around this kind of thing. Specifically, studies have shown:
Decision fatigue is real (meaning, the more decisions we have to make the worse we get at making them, which can explain some money mistakes you might have made in the past).
Humans aren’t good at managing temptation.
This tells us a few things. Number one, willpower isn’t enough. You can set strict budgets all you want, but it’s probably not going to do much good because eventually you’ll crack (we all do).
We run out of willpower, we make too many decisions and start making bad ones — and we feel exhausted the more we try to resist temptation (and because we’re exhausted we make even worse decisions; it’s a vicious cycle!).
Life Doesn’t Fit Neatly Into Tightly Defined Spending Categories
Ever seen a sample budget that lists out “$20 for toiletries,” “$50 for alcohol,” “$150 for groceries,” “$100 for transportation,” and on and on and on?
Budgets with a million line items are meant to capture every possible expense so nothing slips through the cracks. The problem? Life doesn’t arrange itself to fit neatly within these carefully organized categories of spending.
Some months you might spend $300 on groceries, and the next few months you might spend half that. One month you might hit the road a little more and see the amount of money you spend on gas go up, but then a few months later you find yourself walking, biking, or riding public transportation everywhere so your transportation expenses are next to $0.
You might find you spend $50 per month on average on something, but that might look different month-to-month — and you could drive yourself crazy trying to fit that specific expense into that average cost over and over again.
That can make strict budgeting unrealistic… and could leave you feel frustrated with the whole process and ready to give up.
But before you throw up your hands, consider this: what if your budget could work for you without being super strict?
How to Budget in a Way That Won’t Make You Crazy
Here’s one way to budget in a way that’s more balanced — and more realistic if you want to stick with it over time.
Set up automatic contributions to those accounts so you don’t have any excuses for spending that money instead of saving it. Next, determine what’s left after you account for your savings.
Got that number? Good. That’s how much you can spend throughout the rest of the month, on whatever you want.
That does include fixed and flexible expenses, like rent and groceries. But it can also include whatever makes you happy each month, whether that’s travel, nice dinners out, or a few new items for your wardrobe.
As long as you took care of your savings first and pay your bills and necessary costs, you don’t have to strictly allocate every other dollar and cent. You can spend freely with the money you have left (but once it’s gone, of course, it’s gone!)
This allows you to spend on what’s important without worrying if you went “over” in a certain budget category (since you’ll likely spend less or nothing at all in other categories that might be more important to someone else but that you don’t value as much).
The bottom line? Budgeting doesn’t have to be overly complicated or super strict.