Saving for retirement is scary. But not if you break it into small numbers.

The goal for your nest egg is 25x your annual consumption. If you spend $20,000 a year, you need $500,000 to have enough passive income monthly to never have to work for money again. If you spend $50,000 a year, you need $1.25 million (see the need to reduce consumption?).

That sounds all so hard and abstract. You want it broken down into easier numbers?

The miracle of compound interest means that saving $5,000 a year and consistently earning 6% on it (after inflation) creates a $841,000 nest egg after 40 years. Using the 25x rule, that produces $33,000 in yearly retirement income. The key is earning 6% after inflation.

Of course, the miracle of compound interest means the reverse if you're in debt. You pay more and more over time the longer you owe money to someone else. And that's a big deal if the rate is 12%-18% like most credit cards. Credit card debt is a fast chute to financial failure. If you have credit card debt, you should pay that off before you even contemplate anything else in this article.

But back to $5k, 40 years, 6%. This should be the bare minimum goal you have in your financial planning. If you can save more than $5k, you shave off the years. If you earn less than 6%, you add years (I would not count on earning more than 6%, that's just magical thinking). 


It sounds so easy and yet it's so hard. First of all, people don't start saving $5000 a year at age 25. Second, even if they did, most typically do not have the discipline to do it EVERY year for 40 years. And that's just the surface of it. After that, most people invest poorly. They buy stocks when the market is hot and the news is how great the market is and then they sell when the market tanks and everyone is panicking. You can't earn the 6% by buying high and selling low. They don't have the systemic education and perspective to have a disciplined system.

Here's Dilbert creator Scott Adams on success:

"A system is something you do on a regular basis that increases your odds of happiness in the long run. If you do something every day, it's a system. If you're waiting to achieve it someday in the future, it's a goal. The system-versus-goals model can be applied to most human endeavors. In the world of dieting, losing twenty pounds is a goal, but eating right is a system. In the exercise realm, running a marathon in under four hours is a goal, but exercising daily is a system. In business, making a million dollars is a goal, but being a serial entrepreneur is a system."

I think it's also the lack of community and the lack of in-depth education around personal finance. We all sorta know to do this, but it's easy to put off because we've never been trained in it. We didn't learn from our parents and school didn't teach us. It's a huge, unconscionable hole in our educational system. Personal finance is unarguably more important and more relevant to life than Algebra II but I spent a year in Algebra II. 

$5k a year, 40 years, 6%. So easy, and yet so hard.