I'm sure this has come up plenty, but I decided to bring some of my own numbers to the field.
Let's say you're just starting out. You have hit the street with a balance of zero (no savings and no debt) and this is year one of the ten years you're going to work to build up your retirement. One question keeps coming up: "What's the bare minimum I have to be paid to meet my expenses and then save enough to retire in ten years?" After all, maybe this early retirement thing is the rich man's game, not applicable in those parts of the country where the people can barely read and the jobs are just enough to die on.
60K? 80K? Nah, more like 100k, right?
How about $31,444.64? That's what I got as my baseline and I think it's a pretty decent figure that can apply to most in my situation. And a flexible one.
Let's look at the numbers. What are the expenses we're looking at here? I derived my expenses from my personal budget (which does not include mortgage as I'm living with someone) and estimates stolen from other sources (including MMM). My baseline expenses are: $7,861.16. See the end of the post for the breakdown.
Now there's wiggle room there, but in both directions. First off, mortgage is NOT included in that figure, as I stated earlier. We'll cover that later. Second, it's based on living in a pretty wretched part of the country that has low costs and low enjoyability. So costs may be higher where you are or lower cost alternatives may be more plentiful (it's very difficult to save money when Craigslist barely exists out here). Third, I'm single, so this is a bachelorette/bachelor's number, not a family's. However, it's not all doom and gloom: there's plenty of fat that can be trimmed too for the enterprising or the lucky as the number includes personal medical expenses.
But we'll go with a baseline of $7,861.16. For this to be 25% of your earnings, you need to rake in $31,444.64. Doing so leaves you with a nice $23,583.48 to do with what you see fit. Since we're ignoring mortgage, let's just throw that into the calculator. 10 years at 7%...
$325,839.92
"Huh. That's a far cry from the 600k MMM talks about!" Look at those expenses again. For that baseline of expenses, that's only... 2.4% of your $325,839.92. Almost half of the 4% ole' MMM suggests!
"Wait, haven't we been ignoring mortgage all this time?" Well damn, you're right. So, let's take a look at what happens if we throw mortgage in.
Our baseline is $7,861.16. Let's say you want an $80,000 house (standard in my area but a little pricey for one person, so if you're like me, you'll look to cut that boy in half!) and you've only got (like me at the moment) $10k to put down on it (I know I said no savings, but we'll cheat for the sake of this example). What's that going to add to your expenses if you want to pay it off in 10 years so that it's done when you retire?
$825.79 a month or $9,909.48 a year. Which brings your expenses up to $17,770.64. Now, that's 25% of $71,082.56, so you may be thinking, "Yikes! That's a lot more upper class than 31k!" Certainly... if you're going to count your home as an expense. After all, in 10 years, that home'll be your's, free and clear. It's not something you plan to consume like a turkey sandwich. So, in 10 years, when you retire, that mortgage payment is gone.
But what have you got in the nest egg?
$17,770.64 expenses leaves $13,674 of your 31k income. Invested for 10 years at 7% it yields... $188,926.11. "Oh no! Now my retirement is cut almost totally in half!" Don't despair friend. Look at the numbers. Your mortgage? She be gone. Your expenses are now, free and clear, a cool $7,861.16. Which is only 4.2% of that $188,926.11.
4.2%? That's totally doable! And now you have a house that's all your's. You have a decade of good habits from living the high life without paying the high cotton. You're ready to retire. If you need more coin, you don't have to answer to any boss. You just scoop a part time job or self-employment up or you tighten the belt a little to knock that 4.2 down to a 4 or a 3.5.
What do you think? Can you make it on $31,444.64? Is it too low a figure? Hell, is it too high? Tell me what you think!
The Break Down
Here's the expenses used to get $7,861.16.
Car: 794
Food: 3,855
Gas: 777
Health: 360
Insurance: 785.16
Utilities: 1,290
Total: 7,861.16
For mortgage, I assumed an 80K piece of property with a loan of 70k (again, just basing it on my own situation: I only have, at most, 10k I could drop on a house), for a period of 10 year with an interest rate of 5%, 1.25% property tax, 0.5% PMI.
Since I did cheat a bit with the mortgage (assuming savings instead of zero savings), I went back and crunched the numbers on a zero down payment loan for an 80k piece of property. First of, let me add, if you have zero payment and you're alone... try not to go with 80k. You can probably do better at least until you get a downpayment spruced up. Anyway:
80k loan at the same rates for 10 years
$931.86 per month.
$11,182.32 per year.
Combined with the $7,861.16 it gives us a total expense of: $19,043.48.
That leaves us with $12,401.16 per year.
Saved for 10 years at 7% gives us $171,339.98.
Our $7,861.16 expenses are 4.6% of our retirement.
So, even with NO downpayment, still doable.
If I screwed up the math anywhere please let me know. This was actually a trial-by-fire exercise to figure out how to calculate mortgage costs, so you'll be doing both me and the reader a favor.
Taxes
Having completely forget taxes, upon being reminded I did some crunching to figure out what this would be BEFORE taxes were taken out. Note: figuring out taxes from net pay is a bit confusing. However, what I found was that a gross pay of $39,700.44 works for withholding in my state. Depending on your state, it will be different. Now, I have no exemptions or dependents. That will change things too.
In other words: if you can get a 40k a year job, you can make it!