In 2016 the median personal income in the United States was $31,099 per year. This number may seem low, because given a 2080 hour work year, this translates to roughly $15 an hour. Which incidentally is what many want our minimum wage to be and given what side of the political spectrum you happen to be on could be the dawn of a new egalitarian era, or the end of our economy. Politics aside, with the right mix of expectations and planning you could easily live off of this income and be able to save about $4,000 a year for retirement.
The first thing that we have to get straight before we start budgeting out what a $25,000 a year lifestyle looks like is to get our expectations in check. You’re probably not going to able to retire in a high rise in Manhattan (unless someone is nice enough to let you sleep in the bathroom for $1,500 a month). Nor will you be able to eat out every single day. Also kiss most of the fun things you like to do goodbye, as it will probably be too expensive to do, now that your income is drastically reduced to one that is just north of 200% of the federal poverty line.
“Wow that sucks, why would I want to do this?” Well for two reasons, one generating $25,000 a year in passive income is much easier than generating $75,000 in passive income. Also if you’re somehow to generate this budget while being a high earner. The retirement that you actually want will be much faster to obtain because you are obviously spending less money. For example let’s say you’re a high powered manager in a corporation making $150,000 a year. If you’re somehow able to subsist on $25,000 a year then you will generate a post tax cash flow of $ 75,500, meaning that you could easily generate over $1 million dollars and effectively retire (given a low risk 4% return rate) in about 15 years. Will you be balling out? No, but you won’t be working either.
Anyways, the monthly budget itself will look something like this:
Overall assuming that you net about $1,875 this will leave you with $345 dollars to do whatever with. If you’re smart you will put this into an ETF or a REIT that could generate 12% a year. A monthly deposit of $345 into one of these funds (assuming 12% return) will generate OVER $3M in interest and contributions over the course of 40 years.
Of course, this assumes you’re somehow able to keep this going for 40 years. Which to be quite honest is extremely hard (I couldn’t do it) but I’m sure there are some people out there who are insane and capable enough to subsist near or at the poverty line for four decades.
In conclusion saving money is a lot easier than you think and if you’re able to conquer your expectations and commit to a simpler and more frugal way of living then retirement will become easier to achieve. It’s all about staying invested and making your money work for you.
DISCLAIMER: The return rates shown in this post are estimates. Also this is not financial investment advice, any investment decisions should be made with the help of an investment or financial advisory professional.