The $15 Retirement Plan

Some days – in fact, many days – I spend $15 in a way that isn’t the smartest.

I’ll go out to eat for lunch, perhaps. Maybe I’ll buy a book from the Kindle Store, or buy a beverage when I fill up with gas.

Some days I won’t spend that extra $15, but other days I might spend even more on something unnecessary that isn’t that memorable. One day last week, I took all four of my children to Subway when we could have easily had a meal at home, which definitely cost me more than $15 extra.

Do you spend $15 many days on something that’s completely forgettable? Think about earlier today or yesterday. Maybe you bought a latte and a bagel and have practically forgotten about it. Maybe you went to an awful movie a few days ago.

Here’s the thing: All you need is $15 a day to retire very nicely if you start when you’re young. That’s just a bit of pocket money most days.

Let’s run through the math.

If you put aside $15 a day for the full year, that adds up to $5,475, which is a pretty healthy amount. It’s actually very close to the annual contribution limit to an individual retirement account (IRA).

So, what’s an individual retirement account? It’s usually referred to by the acronym IRA, and it’s basically an account that you can open with almost any investment house, within which you can invest and save for retirement.

It’s a lot like a savings account, with just a few differences.

First, when you put money into this account, you have to choose what the investment house does with it. The easiest choice is to just pick a “target-date retirement fund,” which means that they pick investments that are aligned to maximize value at the time you’re going to retire. So, if you’re going to retire in roughly 2055, you’d choose a “Target Retirement 2055” fund.

Second, assuming you choose an option with any level of risk, you’re going to gain a lot of money, but you’re also going to lose money sometimes along the way. You’ll have years where you gain 20% and other years where you lose 10%. What you care about is the long-term average, which should be far higher than an ordinary savings account.

Third, if your income is low enough (if it’s below six figures, you’re fine; if you’re above, you’ll have to check specifics), you can choose a special kind of IRA called a Roth IRA, which means that you don’t have to pay any taxes on the money you take out when you’re of retirement age. It’s all tax-free money!

So, what does this all really look like?

Let’s assume you’re going to earn 7% a year on average in your IRA. That’s what Warren Buffett estimates will be the long-term average return from the stock market, so that’s the number I like to use.

If you start saving $15 a day in your Roth IRA, starting at age 25 and going until age 70, you’re going to have $1,914,207.88 in that account.

Yep, you’ll be a millionaire. Give up some trifling things in your life and you’re going to have a lot of money over the long run.

What if you save just from age 25 to age 65? If you do that, you’ll have $1,339,102.38. Yep, still a millionaire, even at age 65. That’s also true if you start at 30 and go until age 70.

What if you’re starting later? If you start at 30 and go until 65, or you start at 35 and go until 70, you’d have $929,060.11 saved up. Really close to millionaire status, in other words.

man eating subway sandwich
Be honest: Can you even remember the $15 you spent on lunch and coffee yesterday? Photo: Sarah Murray

Now, what does that actually look like in retirement? You’re probably going to withdraw 4% of your balance each year, which means that the amount should last for the rest of your life.

If you withdraw 4% of $1,914,207.88 (the 25 to 70 amount), you’ll have $76,568.32 every year for the rest of your life.

If you withdraw 4% of $1,339,102.38 (the 25 to 65 or 30 to 70 amount), you’ll have $53,564.10 every year for the rest of your life.

If you withdraw 4% of $929,060.11 (the 30 to 65 or 35 to 70 or 25 to 60 amount), you’ll have $37,162.40 every year for the rest of your life.

What if you think you’ll live forever? Well, you could use a withdrawal rate of 3%, which means that you should be able to withdraw that amount for many, many, many years without eating up all of your money. What do things look like then?

If you withdraw 3% of $1,914,207.88 (the 25 to 70 amount), you’ll have $57,426.24 every year for the rest of your life.

If you withdraw 3% of $1,339,102.38 (the 25 to 65 or 30 to 70 amount), you’ll have $40,173.07 every year for the rest of your life.

If you withdraw 3% of $929,060.11 (the 30 to 65 or 35 to 70 or 25 to 60 amount), you’ll have $27,871.80 every year for the rest of your life.

Here’s an important thing to remember: This does not include Social Security. Social Security is on top of these amounts. Check your most recent benefits letter to get a sense of how much that would be.

No matter which scenario you look at, simply saving $15 a day for retirement makes a huge difference. You’ll go from barely getting by with your Social Security money to having plenty of money to have a pleasant life during your later years without having to work until your very last days.

So, the real question is how can you come up with $15 a day? The general answer is to look for your forgettable purchases. Where do you spend money thoughtlessly on things that you soon forget or that have little impact on your life? Things like your forgettable morning coffee or things that you buy and stuff in your closet.

Another key strategy is to look for incremental savings. For those unaware, incremental savings come from cutting or eliminating your regular bills. Here’s a list of 20 ways to easily find incremental savings in your life. If you follow that list, you can easily find $15 a day without drastically altering your quality of living.

One big area where we overspend is with food. Try eating out less. Buy more store-brand items when you’re shopping. Eat more fresh produce, especially the stuff that’s on sale. Stick to the cheap and delicious staples, like bananas and apples.

For many people, hobby and entertainment spending can add up to a lot. Take a look at your subscriptions – can any of them be cut? What about the premium channels on your cable? What’s your main hobby? Can you find ways to cut back on your spending on that without cutting into your hobby enjoyment?

Once you’ve figured out how to trim that $15 from your budget, sign up for a Roth IRA from a good investment house. I personally use Vanguard and highly recommend them for their low-cost funds. Then, set up an automatic transfer from your checking account for $105 a week – $15 times seven days.

Then sit back and let it ride. Your retirement is well in hand, and all it took was a bit of pocket money you were spending on forgettable things.

Here’s the number one thing to take home from this article, even if you decide that you don’t want to follow the $15 a day plan: Saving for retirement isn’t impossible.

It isn’t something magic that only rich people can do. It’s something that anyone can do, provided they’re willing to give up a few frivolous things and put a plan in place when they’re young. It doesn’t take that much money. It just takes a willingness to do it.

But what if you’re older? Sadly, the older you are, the harder it gets. You’ll either have to save more per day, delay your retirement date, live on less than someone who started earlier, or some combination of these factors.

For those in their twenties or thirties, though, this $15 a day plan will put you in a pretty good place when it comes to retirement. All you have to do is set things up and get started.

Good luck!

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Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.