Imagine you're 80 years old. The odds are pretty slim that you'll be out there commuting to work. You may very well be investing online or trying to earn money one way or another from the comfort of your easy chair. But let's not go there.
Perhaps by putting ourselves in the shoes of our 80 year old selves we can work backwards in order to discover what we need today. And if it's not enough money then today is a good time to start changing your habits.
Photo: Professional dog walkers. Never underestimate one’s creativity when it comes to making money
If you are an American there are three main income sources as a non-working senior citizen. Social security, a voluntary retirement account that you set up during your working years (401k), and dividend income from stocks that you own.
To break it down:
- the average American social security payout in 2020 was $1,514 a month.
- median 401K balance: $62,000
- median of stock market holdings: $40,000; 52% of USA families hold stock
If we do some quick math and add the median 401k balance to the median stock market holdings we get roughly $100,000. And if we assume 4% dividend income by investing on the conservative side, we get $4,000 USD a year or $333 per month. Add social security and you get $1,847 or let's say $1,850 a month.
That's the nest egg that the average American can rely on. But you're not the average American. You need to estimate what this number is for you. Today if possible.
While we are still engaged in the working world we can't think like an 80 year old. And because of that there's a fog of familiarity that clouds our day to day judgements. And for some of us the fog is pretty thick.
However, our willingness to seek some clarity is also the key to our financial freedom. If we can take command of our habits from a financial point of view then we can take reliable steps to increase our net worth, which translates into greater monthly income throughout our non-working years.
And remember, money compounds far better the longer we remain hands-off and let it grow.
Save like a pessimist and invest like an optimist. They’re different skills that can contradict each other. But you need both to build wealth over time. Survive the short run to enjoy the fruits of the long run.
When a crisis hits you can't help but pull yourself together, as survival locks in your focus. But saving like a pessimist isn't all doom and gloom if you realize that the seeds you're planting are going to bear fruit when you are unable to earn money.
From the same author:
Managing lifestyle can have the same impact on your net worth as increasing returns. And it’s easier the more it's in your control. Wealth is just the gap between what you have and what you spend/want.
Managing your lifestyle breaks down to setting priorities. If you want to have financial freedom then that becomes priority #1.
Make it your de-fogger.