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How Much Do You Need To Retire? Why Five Bucks A Day Matters

Doug Carey, CFA
There's a Harley Davidson ad campaign going right now (for their Street 750 bike) that attempts to entice would-be bikers with this line: 

"They Say Money Is The Root Of All Evil. $5 A Day Will Get You All You Can Handle." 

The pitch: Put $750 down on a $7,500 bike, and at 5.75% APR over 5 years, you can have a sweet new ride for about $5 a day.

A couple things about this. First, the "they" Harley refers to is a Bible verse, and the saying refers not to money, but the love of money as the root of all evil. A nuanced difference, but a difference to be sure. (And a topic for another blog post, maybe.)

Second, Harley has this part right: Financing a motorcycle like this does get you all the evil you can handle. It's a truly evil idea, and it can have a big effect on how much you need to retire.

We are marketed to in similar ways all the time. Amazon and PayPal and the like are always virtually shoving credit card offers in your face; the same thing happens with a lot of big-box brick-and-mortar retailers. Introductory rates are low; first purchases on the card might get you $50 or $100 off. It seems like a win-win.

But it's not. When the question "How much do you need to retire" comes up, most people reflexively think of a target to hit. A million dollars, two million dollars. If I can just get to a certain amount, people think, I'll be set.

That's only half of the equation, though. Spending is the other half. The amount you need to retire on is directly dependent on how much you plan to spend. And the more you're spending on financing (interest), the more you'll need to save.

Consider someone in their mid 20s flipping through Rolling Stone and seeing this offer from Harley Davidson. "Five bucks a day? I can do that!" And they start thinking about how they can scrape together the $750 down payment.

But let's turn that on its head: $5 a day means $1,825 per year. What if that money were invested in growth stocks in an IRA instead? At the end of five years, assuming 8% annual growth, that's about $11,700. So instead of a rapidly depreciating asset (a motorcycle) that you ended up paying a lot more than sticker price on (due to the financing), you now have an appreciating asset (stocks) and a nice start on saving for retirement. Keep that $5 a day going (though hopefully a lot more than that), and, thanks to compounding, you have a balance of about $100,000 after 20 years.

There's nothing wrong with a little indulgence. If owning a Harley is a goal, by all means make plans to reach that goal, just as you would any other goal. Just be smart about it, don't finance it, and prioritize it among other goals--and always consider how those goals might affect how much you need to retire.

What effect might saving just five more dollars per day have on your retirement plan? WealthTrace can help you find out. See how making small changes to savings can have a big effect on the probability of your plan succeeding. Use a free trial of our personal financial planning software to find out more.

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Doug Carey, CFA