How to Retire Wealthy
Turns out that it’s not hard to retire wealthy… as long as you follow the right steps.
You have worked your entire life and now you’d like to retire wealthy.
There’s just one problem, you have 10 years left to live.
This is a hypothetical scenario so, please, just go with it.
Alright. 10 years.
You know with near certainty that these last 10 years are all you get.
What do you want them to look like?
Do you want to spend your remaining time on Earth working? Longing for evenings and weekends so you can run errands and watch TV? Making a dime so someone else can make a dollar?
You’ve been dreaming of the day you retire wealthy — what does that actually mean to you?
See, imagining that the next 10 years will be your last makes you rethink your priorities a bit, and it adds some desperation.
But let’s back up for a second:
Because if you’re reading this, you probably have MORE than 10 years left to live. Lots more.
The situation above is the position most elderly folks find themselves in — especially in the U.S.
It’s a position you don’t want to find yourself in one day.
And people are simply in this position because they had no idea what it actually takes to prepare for a wealthy retirement.
So, what does it really take to retire wealthy?
Well, first there are three things to consider…
The quality of life you WANT
The money you NEED to achieve that quality of life
And what you must DO to get that amount of money
What Does YOUR Retirement Look Like?
Understanding your retirement is a crucial part to understanding why it’s so important to prepare for it - perhaps in an entirely different form than you’ve been told.
In short…
You’re about to learn why you mostly likely need A LOT more saved for retirement than you think.
Unfortunately, most Americans do not fully understand the amount of money it takes to retire, let alone retire wealthy. This may be that many folks are not ready to face the realities of it.
We've all heard the average life expectancy in the U.S. is about 79.
But according to newer studies, the most frequent age of death is actually 87.
And here’s the thing…
There’s a good chance you’re going to spend a good chunk of those years — to 87 — in and out of the doctors.
Actually, according to Forbes, you can expect to be in a health care setting 17 to 25 days out of every year.
As you can imagine, all those doctors visits can add up a pretty big bill.
So, it’s not a surprise that about 30% of the U.S. homeless population is over the age of 50.
One study even showed that by 2025, 9.5 million elderly Americans will not have the money to afford enough food.
Is that how you want to spend your retirement?
I bet not. I bet you thought retirement meant golfing or gardening every day until you died peacefully in a hospital bed, surrounded by people who love you.
So, let’s get down to the core of it…
Why is it so difficult for Americans to retire wealthy?
[Editor’s Note: if you’re wondering what it takes to retire wealthy check out this piece here.]
Listen, this isn’t meant to depress you.
The way to avoid a lot of these quality-of-life problems comes down to how you live when you’re younger and how much money you need.
And understanding that the quality of life you want is probably going to cost more than you think.
(Go ahead - read that line above again. It’s important you come to terms with that as soon as possible.)
USA Today suggests that the typical retirement-age American spends $50,220 a year. (This varies greatly by state and can even reach $74,000 a year.)
But if you’re like most, you’re going to want a little more oomph in your retirement.
So, how much money do you need to sprinkle some luxury into your life?
Somewhere around $120,000 a year. And that’s not including the cost of assets like your home.
This might seem mind-boggling to you, considering that the median personal income in the U.S. was $35,977 per year as of 2019…
The median retirement account balance is $65,000…
And the average Social Security benefit is currently about $18,516 per year.
Something isn’t adding up, right?
Well, sadly, those are real stats.
And despite these facts, folks still don’t take the action they need to simply afford retirement.
Now for the good news…
There are a few things you have full control of now that can help ensure you retire wealthy…
● You can change your quality-of-life expectations.
● You can change your cost of living by moving to a cheaper location, like Mississippi, Alabama, or a country like Malaysia, Portugal, or Costa Rica.
● You can change the amount of money you have.
● (Or you can do some combination of the above.)
Find Out How Much Money You Actually Need to Retire Wealthy
How much money do you really need to retire wealthy or even rich?
It’s actually pretty easy to calculate…
Take the annual cost of living to achieve the lifestyle you want...
Multiply it by 10…
And then factor inflation in. (But if you want to guesstimate, expect between 3.4% and 6.3% per year. We’ll say 5%.)
[Get DIYwealth’s FREE Inflation Guide here]
You can use this calculator.
● Where it says “Present value,” just put the number you plan to live on at times 10 (you can just add a 0 to the end of your annual cost of living).
● Where it says “Number of years,” put the number of years until you plan to begin your Back 10.
● Finally, for “Compounded,” select “Annually” and hit execute.
That’s it. That’ll give you the total amount you need to live the last 10 years of your life the way you want.
Meaning…
If you plan to spend $50,220 per year, you’ll need $502,200.
Adjusted for inflation, that’ll be $818,000 in 10 years… $1.7 million in 25 years… and $5.7 million in 50 years.
If you plan to spend $120,000 per year, you’ll need $1.2 million. That’ll be $1.9 million in 10 years… $4 million in 25 years… and $13.7 million in 50 years.
Let’s just say, for the sake of simplicity, that your last 10 years will cost… Somewhere around $4.1 million.
That’s probably more than you expected, isn’t it?
And again, we’re just talking about your final 10 years of life. You want to think about your last 20? Your last 30? You’re going to need a lot more to retire wealthy.
Keep in mind…
What you might interpret as retiring wealthy could be completely different to yours neighbors idea of a wealthy retirement.
But the bottom line is, regardless of what you envision — it’s more likely than not that you’re going to need a heck of a lot more money than you think in order to retire “your version” of wealthy.
So let’s get straight to the point…
How can you retire wealthy?
And…
How Do You Get Enough Money to Retire Wealthy?
To get enough money to retire wealthy, and to fund 10 years of your life with a little sprinkling of luxury thrown in, you’re going to NEED a lot when you factor in for inflation. (As you witnessed above.)
The only way to reduce that is to either reduce what you WANT or increase what you DO.
Let’s go back to a question from earlier…
What does your retirement look like?
Think about it, write it down.
Then ask yourself: What must I do to hit my retirement goals?
Very quickly you’ll realize, what you’re currently doing will not cut it.
So here’s the not-so-secret secret to any wealth building goal (this includes retiring wealthy)…
The key to any type of wealth building is to get paid multiple times for every hour you work.
That’s it. That’s the formula.
Before we move forward, lets quickly recap…
You’ve had to think long and hard about what retirement looks like for you… And you’ve now learned you need A LOT more money than you think you need to retire wealthy.
What comes next?
It’s time to follow the formula above and find more ways to make money.
Get Ready to Retire Wealthy
Making a $1 million is hard, let alone making $4.1 million or whatever your retirement goal number is..
If you’re working 50 hours a week at $15 per hour, it will take you more than 25 years to gross $1 million total.
If you wanted to simply save $1 million in, say, seven years…
You need to be putting aside $2,748 every single week.
If you’re willing to wait 20 years?
You need to be putting aside $962 every single week.
And if what you save is only 50% of your pay?
That means that, to become a millionaire in 20 years, your take home pay needs to be $100,000 per year AND you need to put aside 50% of your income.
For most people, that’s completely unrealistic. After all, the median income for individuals is about $36,000 per year.
Most people operate under the assumption that their job should provide them with enough money to live on as well as enough money to retire on.
But that is just not the world we live in. And it won’t be in our lifetimes.
Here’s the bitter truth…
If you want to save up enough to enjoy the last 10 years of your life simply working an average job for average pay — it’s NOT going to happen.
If you want to be able to save for retirement, you’re going to have to take advantage of one of the most powerful forces in the universe: Compounding
Compounding is a simple investment strategy in which you put your money in an investment that pays a return. At the end of the year, you take your return and reinvest it with your original stake. Your dividend, or interest on your investment, earns a return, too, building a bigger dividend — or higher interest payments — the next year.
A snowball is the best analogy for compounding. As you roll the ball through the snow, the surface area gets bigger. The more surface area on the snowball, the more snow it picks up. The snowball gains mass slowly at first... but pretty soon, it’s so large you can’t move it.
Compounding is slow and boring at first. But boy is it powerful.
Once you tap into compounding there is not limit to how you can make your money grow. And eventually, retire wealthy.
The best part of compounding?
You don’t need to be rich to have your money make money (compounding)… you just have to do one thing...
Develop Other Streams of Income
Now, you don’t need a lot of money to start tapping into the force of compounding, but you do need steady income…
And the only way to increase your income is to get paid multiple times for every hour you work.
If you’re able to do all of that, the rate at which you make money will multiply and accelerate.
(For the sake of simplicity, we’re not going to factor in taxes or inflation, which compounds the complexity of these calculations. And, of course, these numbers are based on what’s typical in the United States.)
Monetize Your Byproducts
I bet you make really tasty macaroons. Or maybe you brew beer as a hobby. Or perhaps you like to write stories. Or perhaps you walk a dog every day.
Regardless, in all likelihood you produce something in your daily life that has value. Even your excess time has value, if you’re willing to sell it.
But the key at this intermediary (and optional) level is to take the stuff you ALREADY DO, the byproducts of your life, and make more money from it.
If you have a big home garden? Sell your vegetables (or turn them into pickles and sell those for even more).
Do you work daily as an educator? A dog walker? A trucker? Do you have a hobby? You can make and monetize a blog, a vlog, a website, an ebook.
As you become wealthier or more experienced, this might turn into consulting fees or royalties or licensing fees. Here, the “byproduct” is your experience that other people want to learn from or stuff you made in the past that continues to make money.
You might even consider picking up side work on an “e-Lancing” platform like Upwork or Fiverr. You might even pick up a gig driving for Uber or picking up groceries for people.
I know, from experience, that it’s totally possible to earn an extra $20,000 to $30,000 per year working a second job or picking up freelancing gigs on the side of a full-time job.
Even if it’s not much, a little bit of extra income from the stuff you’re already doing will take you a long way toward your goal of retiring wealthy — especially if you’re trying to pay down debt or fund some of the other, higher levels of wealth building.
2. Save Some Cash Each Month
You might not feel like this now but putting aside 10% of your monthly paycheck is supremely doable, no matter what your income level is.
The key to saving is to pay yourself — that is, to sock money away — before anything or anyone else… Before debt, before bills, before anything else.
Don’t even think about it. Just do it.
If you can automate this process with a regular transfer the second your paycheck hits your bank account, even better.
If you’re making $36,000 per year, you’re putting aside $3,600 per year. That’ll leave you with $72,000 saved up in 20 years.
We’re already on the right track, but this isn’t good enough yet.
The key is to start by putting aside 10% a month and making sure that number keeps pace with your income or accelerates.
After all, if you’re earning $36,000 per year, saving 10% of your income is going to have a much bigger impact on your quality of life than if you were earning $100,000.
Still, no matter how much you save, if your cash isn’t working for you, you’re still not going to get close to where you need to be to retire rich.
3. Max out a Retirement Account and Investing in Safe Stocks
Here’s where your money can start to make money to live richly in retirement.
Personally, I recommend people start with income-generating stocks, because it’s the easiest and most passive way to mine income.
But there are other ways that you can save up for retirement, too. Let’s go through all of them:
Roth IRA
401(k)
Traditional IRA
Self-directed IRA
SEP IRA
Solo 401(k)
Roth IRA
An IRA allows you to put money into an account that is either tax-deferred or tax-free. If you follow the guidelines, you can avoid paying taxes on the capital gains or dividends. If you need money for an emergency, you can also withdraw your money tax free and without any penalties.
However, your best bet is to not withdraw from your IRA if possible because this is money that you are specifically saving for your retirement and should be considered a long-term strategy for your future.
In the U.S., you can transfer up to $6,000 per year into the account if you are under 50. If you are over 50, you can add $1,000 more to your contribution for a total of $7,000. This is called a “catch-up contribution.”
Now, this can be a little tricky because if you don’t contribute to your IRA by the cutoff date, you are, unfortunately, out of luck.
It’s pretty easy to open up a Roth IRA account, and you can do it at a bank or through a broker.
Let’s walk through some of the benefits of having an IRA:
Double Contributions: We will discuss a 401(k) below, but you have the ability to contribute to both an IRA and a 401(k)
Savings on Taxes: The good news about an IRA is that you can pay taxes on your contributions now when your tax rate could be lower than the tax rate you might find yourself at when you are in retirement. You can breathe easy knowing that your taxes have already been paid for your contributions.
You have time: Every year, you can contribute up until taxes are due for the previous calendar year.
Age isn’t a factor: Anyone at any age can contribute to an IRA at any age.
Withdrawl is simple: You can take out money at any time without being penalized. However, if you withdraw the earnings from the investments in the account, you’ll probably have to pay taxes.
Benefits when you’re older: When you are 59.5 years old, and you’ve also had an account for at least five years, you can take the money from your account, including the earnings from stocks, without paying taxes.
These all seem like great benefits… but what are some of the disadvantages? Here are some of the big ones:
Penalties: As we discussed above, if you withdraw your investment earnings early (younger than 59.5) from your account, you will have to pay a penalty unless you meet the following exceptions
You withdraw due to disability.
Someone, a beneficiary, withdraws from your account due to your death.
You withdraw up to $10,000 to purchase your first home.
Your withdrawl is because of health insurance premiums while you are unemployed.
You withdraw due to education expenses.
You withdraw money because of an IRS levy.
You have to withdraw money (up to $5,000) because of a birth or adoption of a child.
401(k)
Chances are, you’ve probably heard of a 401(k) from your job or even heard it in passing. But if you haven’t, what exactly is a 401(k) and how does it work?
To start, a 401(k) is simple a retirement investing and savings account that many employers offer to their employees. Your contributions can range based on how much you are willing, or can, set aside. The contribution comes directly from your paycheck, too, before you pay federal taxes.
As long as you have money in your 401(k) account, you won’t have to pay taxes on capital gains. However, eventually your contributions will be taxed when you start withdrawing money from your 401(k).
The annual contribution limit is $19,500, as of 2021. With this kind of retirement savings account, your tax break comes either after or before you contribute money.
The best part about this retirement savings plan is that employers will often match a portion of your contribution. It is in your best interest to take advantage of this perk because it is essentially free money.
When, and if, you decide to leave your job, you have the ability to take your 401(k) with you. You can do this by rolling over your 401(k) into an IRA.
(Now, if you don’t work for a company that offers a 401(k), you aren’t out of luck. You can set up an IRA account. You can choose from a traditional IRA, a self-directed IRA, a simple IRA and a SEP IRA.)
Solo 401(k)
If you are self-employed, you have one amazing perk — you can open up a solo 401(k), which is essentially a 401(k) just for yourself. It is a plan that only works for one person without any employees. The only exception is if you have a spouse who makes an income from your business.
Here’s the basics about a solo 401(k):
● Your contributions will be made pre-tax.
● Your distributions in retirement will be taxed as income
● As of 2021, you can contribute up to $58,000 with a catch-up limit of $6,500 if you are over the age of 50.
You can open up a solo 401(k) at a broker, and often you can do it online. Just make sure that you have an employer identification number, which you can apply for through the IRS.
Traditional IRA
Simply, a traditional IRA is an individual account for retirement that you can make contributions to pretax. You have to make an income to contribute to the account.
A traditional IRA is different from a Roth IRA. Whereas with a Roth IRA you essentially never pay taxes as long as you are following the rules, the money in a traditional IRA grows tax deferred. This means that once you retire, you will have to pay income tax on it.
You can open up your traditional IRA account from a broker and then you will be able to invest in both stocks and bonds. The contribution limit is $6,000 in 2021, and $7,000 if you’re older than 50.
If you withdraw money from this account before you are 59.5 years old, you will have to pay a 10% penalty and the money may be taxed as income. You have to start taking distributions from this account once you reach 70.5 years old.
One more thing to keep in mind: If you or your spouse have a 401(k) at work, or other retirement plan, the amount of money that you can contribute to this account is reduced once you hit a certain amount.
SIMPLE IRA
A SIMPLE IRA or a Savings Incentive Match Plan for Employees is a version of a 401(k) plan but for small companies. This plan follows similar rules that IRAs have to follow. You are eligible for this plan if you have been paid at least $5,000 within the past two calendar years.
Basically, this plan lets employees who are eligible the ability to place a portion of their salary (pretax) into an individual account for investing. Employers must contribute to this plan, but the amount they have to contribute is lower than a 401(k). If you are self-employed, you can also contribute to this plan if you want.
Companies with less than 100 people will often sometimes offer this plan to its employees instead of a 401(k) because it is easier to set up.
If you are contributing to this SIMPLE IRA, as an employee, you can contribute up to $13,500 a year if you are under the age of 50. If you are over 50, you can pay $3,000 more as a catch-up contribution.
SEP IRA
A SEP IRA is basically a retirement account that lets business owners and people who are self-employed save money. Your investments in this account will grow tax-deferred until you retire and then the distributions will be taxed as income.
With this plan, if you have employees who are eligible (people who are over 21, have worked for your business for the past three out of five years and have earned $600 in the past year) you would have to make a contribution for them.
With these contributions, they must be the same that you make for yourself. For example, if you put away 10% of your income into a SEP IRA, you must also put 10% of the employee’s salary into their plan.
With this plan, contributions can’t be:
More than 25% of an employee’s compensation
Or be more than $58,000, as of 2021
This plan can be combined with a traditional IRA or Roth IRA, you don’t have to commit to contributing to the plan every year, and your contributions are tax deductible.
However, you must make a minimum distribution by the age of 72.
4. Set Up an Additional Investment Account
If you’re making enough money that you could, theoretically, invest more than $6,000 per year, you absolutely should.
It doesn’t matter if it’s trading options, buying crypto, using p2p lending services, etc.
Don’t let government mandated ceilings stop you from continuing to let your money work for you.
You don’t even need to make much money here to see a huge impact on your wealth.
Say you’re able to put away another $4,000 per year and your assets manage to appreciate 12% per year — a high but not unattainable goal.
After 20 years, you’ll have $288,000.
If you began this process at 30 years old and achieved the goals of the levels leading up to this point, you’re now 50 years old with $714,000 in cash or cash you can easily liquidate.
If you start this process at 50, you’re now 70 with $714,000 to fund your wealthy retirement.
Are you starting to see the snowballing effect of compounding, here?
Create a Checklist to Retire Wealthy
Now that we’ve gone through the steps you need to take to retire wealthy, make a checklist for what you need to do right now. No matter how far or close to retirement, this will be more than beneficial to know the following.
Make a “rainy-day” fund: (It’s crucial to have an emergency fund to cover up to six months of living expenses. This can be cash safely put away or in a high-interest savings account.)
Pay yourself: Sock money away before anything or anyone else… Before debt, before bills, before anything else you pay for.
Max-out your 401(k)… IRA: Don’t leave free money on the table. If your employer will match your 401(k) make sure you take advantage of it. And if you can put the maximum amount into your IRA.
Figure out when you can retire: As we addressed above, you need more money than you think you’ll need to have a wealthy retirement. You can use a calculator like this one that we created.
Understand your benefits: Social security is a benefit that almost everyone gets in retirement. Make sure you know exactly what you will need to do to apply for it.
Buy life insurance and create a will : It’s a good idea to sit down and think about the type of will that you will need. It can be uncomfortable to think about, but you’ll be able to have some control over your legacy.
Calculate your expenses: There’s actually a way to figure out how much you’ll need for and during your retirement. You can use a calculator like this one, or following our guide here, can help you figure out those numbers.
Set the date!
Now that you’ve gone through all these steps, you’re well on your way to retiring wealthy!