Most articles on the subject of retirement planning focus completely on growing tax sheltered retirement savings plans like 401k?s and IRA?s. It?s an effort to build a large capital base as a way of creating a strong retirement income to enable us to maintain the lifestyle we?ve become accustomed to during the course of our lives. Few pundits ever deal with the flip side of that effort?establishing a low cost – debt free lifestyle early in life.
For a generation addicted to McMansions, late model cars, eating out, vacations at five star resorts and the like, no amount of money salted away may ever be enough.
Adopting a low cost/debt free lifestyle
In Will A Million Dollars be Enough to Retire On? we discussed the very real possibility that even a seven figure retirement portfolio may be insufficient to guarantee a secure retirement. Inflation, both leading up to retirement and continuing after, will steadily erode the future value of large portfolios leaving greatly reduced spending power in real terms. But perhaps even more significant, relatively few people will attain a retirement portfolio of that size.
If this is the case, then perhaps the single best plan we can have will be a plan for a low cost – debt free lifestyle. There?s a tendency to believe that this is something we can do later when we?re actually in retirement. For a number of reasons, that thinking misses the mark:
- A low cost – debt free lifestyle will enable faster and greater accumulation of savings throughout life.
- It will mean less income will be required in retirement.
- Many spending decisions are structural and long term in nature. For example, what type of house you buy early in life is a decision that will impact your spending patterns for decades. See the next section.
- A high cost lifestyle is intimately connected with debt.
- Frugal living forces us to think and work around challenges, rather than following the herd and paying the shelf price for everything. If this approach is valuable during our working lives, it will be even more so when we?re older and retired and options are constrained.
- Frugal living is a habit, a lifestyle; the sooner it?s adopted, the easier and more complete the acceptance. If you have expensive tastes throughout your life, you?ll carry that and it?s associated costs into retirement.
This is something that needs to be done now, not when we?re 65. Frugality isn?t an age thing. If you?re old enough to be funding a retirement plan, then you?re old enough to adopt a low cost/debt free lifestyle.
The mechanics of a low cost – debt free lifestyle
It?s easy enough to talk about the theory of living a more frugal life, but what does that mean in practical terms?
Housing. Buying a high end home locks you into a high mortgage payment, high maintenance and repair bills, high utility costs, and another major expense we don?t think about: a high end house requires high end toys to fill it. That?s a treadmill that once we?re on, it?s almost impossible to get off. Retirement strategy: buy less house than you can afford, and be purposeful about paying off the mortgage as soon as possible.
Cars. We can spend a lot or a little on cars, and while the ego gratification of having an expensive model can be substantial, so too is the drain on finances. The classic pattern of trading up to a more expensive car every five years locks you into the never ending cycle of bigger-is-better as well as a state of perpetual debt. An average monthly car payment of $500 made continuously from age 25 to 65 totals $240,000! Can you at least cut that in a half? Retirement strategy: either switch to buying used cars, or plan to buy new, payoff quickly and hold the car for at least 10 years.
Credit. One thing none of us needs to be carrying into retirement is debt. But many in our culture have become too comfortable with it. We need to think of debt as a parasite. It represents a reduction in cash flow; every dollar paid into debt service is one more that isn?t going into savings or some other productive capacity. Retirement strategy: stop borrowing and begin paying off existing debt. Debt is a bad habit, a lifestyle, so get control of it now. The less debt we have the more control we have over our incomes, and the less income we?ll need in retirement.
Pastimes. In today?s marketing driven world, we?re herded into participation in activities that come with a high price tag. A big chunk of many household budgets is squandered fighting boredom. Trips to the mall, the movies and fun parks are examples. Some others we don?t typically think of as pastimes include gambling, smoking, and excessive drinking, which are not only expensive but can also bring complications beyond finances. Retirement strategy: embrace simple pleasures. Often we spend money because we haven?t found those things that truly make us happy. But happiness is usually found in the things we do to connect with ourselves and with other people, and usually don?t cost much at all.
Eating out. In a true sense, this is probably the most superfluous expense we incur. It?s basically getting someone else to prepare our food, something we could do ourselves and for a lot less money. Apart from the cost, most restaurant food is not as healthy as what we could prepare for ourselves. As with pastimes, much of what drives us to it is boredom. Retirement strategy: embrace cooking as a pastime. See it as an opportunity not only to control expenses, but also to take charge of your health, and to improve connections with family and friends by having them over for dinner more frequently.
Addiction to stuff. How much stuff do you need to be happy? How many computer games, mechanical gadgets, jewelry, clothes, furniture, time shares and sports equipment will it take? Stuff rarely fills inner needs or brings us closer to other people?which might be what we?re really seeking just before we go on a buying binge. Retirement strategy: Shift from buying things to doing things. Life is what we do, not what we have. If we think we need a lot of stuff to be happy, there are probably a few things going on that we don?t want to face.
Maintaining good health and healthy living habits. This topic is almost never mentioned in any discussion of retirement planning, but its relevance should be self-evident. The biggest variable expense for the elderly is healthcare, and the best financial planning available may be of little consequence if we enter retirement in poor health, tethered to the healthcare community and dependent on multiple drug therapies. Not only will health problems soak up much or most of our resources, but they can also prevent us from being able to work to supplement retirement income, in addition to keeping us from living life to the fullest. Many of the ailments of old age are preventable with better choices early and throughout life. Retirement strategy: adopt a lifestyle of better eating habits, regular exercise and avoid activities that have a high likelihood of causing crippling injuries.
In the event that tax sheltered retirement savings end up being less generous than the financial media promises, and/or if Social Security and Medicare are reduced or eliminated, a greater emphasis on a low cost – debt free lifestyle may be the most effective counter plan we can have.
What other expenses can we cut now that might have a positive impact on our retirement planning?
I think this topic is so underrated! One of the biggest ways to achieve your retirement dreams and goals is to shred debt, simplify your lifestyle and create multiple sources of incomes – yet, it seems that most “popular” retirement planning advice poitns to saving millions of dollars because it is assumed or implied that most folks will increase their standard of livings and buy more trinkets through leverage! Our addiction to stuff is ridiculous!
I don’t want to be like my parents, in their 70’s, with two car payments and a mortgage.
My plan is not to retire until we can do so debt-free and to live a reduced lifestyle as you’re advocating.
Jason, I agree, all of the emphasis is on retirement planning that will enable a high standard of living. I don’t think that will be possible or realistic for the vast majority of people. Living on less will be at least as important, along with procuring additional income sources.
Bucksome, that’s exactly what I mean about people getting too comfortable with debt. It’s no longer viewed as the boogeyman it was a few years ago, and that’s going to impair more than a few retirement dreams.
Except for eating out more than we should due to our busy lifestyle, I am doing alright then. 🙂 Perhaps, since the house is paid for and we have no debt at all, this indulgence can be forgiven?
Indiana Teacher – balance is always the key, so if you’ve you’ve got things covered in most categories, you’re in great shape! Having no debt gives you the right to certain indulgences. The recommendation against is mostly if you don’t have general spending under control. But you’re clearly on the right path.
Great points. If you look at lifestyle habits over 20-30 years…they can make a difference in what you spend and consequently save and invest.
Ken – Absolutely! We’re always told about the importance of saving and investing and the impact that will have over 20-30 years. The same is true of spending and debt, not to mention that more conservative spending habits will go a long way toward facilitating greater savings.
I’m really surprised this isn’t covered more often. It’s almost as if retirement savings is in a vaccuum. We know that can’t be true.
We usually say that we are living below our means when we refer to a low cost/debt free life style, but in reality I think we are living at our means if we save 10-15% of our net income and if we don’t need to cover high debt payments. Our thinking may have gotten warped somewhere. We also know that it will be a lot easier to sustain our life style when we retire. After all, we never got accustomed to lots of luxuries during our work years.
ctreit- It sounds like you’re better prepared than most. There seems to be a society wide idea that we can live life to the hilt, and as long as we faithfully fund our 401k’s, we’ll be able to live high right to the grave. That seems more like a TV image, I don’t think real life is ever that simple.
Indeed, very few pundits deal with this. What’s worse, we have to fight an upstream battle against other pundits who advocate a high consumption lifestyle that requires millions in retirement savings to accomplish.
ERE – So true. The message of the media is “you can have it all”. Ever notice that no one on TV shows ever seems to have money problems? They have all kinds of other troubles, but plenty of money is always a given. That’s a subtle, but powerful message.
Is it any wonder people spend money they don’t have??? In real life, we can’t have it all. We have to make choices.
“Health is wealth” is well known to all and everyone wants good health.So, Let us build a food habit discipline, keep pace with work, rest and exercise to Achieve good health, The ultimate wealth.
Health Dude – Health is wealth, that’s good. No doubt there are people who neglect their health in pursuit of more money, and it’s possible for a person to burn their bodies out preparing for retirement. Killing themselves for 50 years so the last 20 will be lived in comfort or better. If you don’t have your health, there won’t be much else even if you do have plenty of money.
nice post. thanks.
Even though I’m still 35 years or so away from retirement (::shudder::), I know I have to be responsible with my finances. If that means I don’t get a new car every few years or that I have to make some financial sacrifices, so be it. That $240K number you used as an example is staggering — and sobering.
Rainy Day Saver, “That $240K number you used as an example is staggering ? and sobering.”–It was stunning to me when I calculated it, which is why it was included in the post.
Big numbers can really get our attention, especially when we’re looking at expenses.
We probably need to perform similar calculations involving any expensive habits/hobbies we have, or even of any financial weaknesses we might have. We tend to do what we do without calculating the longterm costs. Big mistake!
Great post! We too made the decision to have our finances in order before retiring. We made the first hurdle by socking every penny into our mortgage and now am happy to say am mortgage free. We purchase a car and own it for a long time, only once did we buy new and only as they offered 0% financing and that truck should last us well into retirement. Want to be able to enjoy our later years without financial worry.
Linda, well done! The financial world is awash in recommendations on how to build up the million dollar nest egg, but gives little discussion to the topic of a lower cost lifestyle. Since most people won’t have millions of dollars to retire on, this could be the most important step.
This is the best post I’ve found on the subject of cutting costs and retirement planning in general. I live in california and am in my last year in college studying for a degree in psychology. I’m also a disabled USMC veteran that lives on about $900 per month. I live with my mom and drive her car at this point and my weakness is I can’t get away from eating fast food once per day.
I also bring my mom back some food which that with gas and small incidentals, like an occasional chiropractor visit eats away all of my income. She’s on a reverse mortgage so when she passes away I’ll be forced to fend for myself since I have no other relatives. When I graduate from college, assuming I can land a decent job paying 20-30k yearly, my plan is to pay off her remaining tax bill and my student loan the first year. Then save for a $20,000 to $30,000 mobile home my second year so I’ll have a place to stay.
Then continue working until I can estimate my monthly expenditures and prorate them out and put that money in a money market and pull it when I need it. I don’t wanna move out of California since I like it so much and would be content in a mobile home, since I don’t see me saving enough to get a house, or the associated expenses that go along with it. Unless things dramatically change my plan is just to get comfortable in my job and work the rest of my life and to hopefully make my internet business more successful which could help cover more of my recurring pills. But other than eating out which is my weak point I don’t have any other big spending plans anymore.
The good thing I do have going for me is I’m debt free and my plans are to stay that way. I was 40k in debt 2 years ago and filed bankruptcy, had the house and the car, it just buried me. I don’t wanna go through that again.
A house is the pain thing. Live the house of your dreams while you have income, and live more moderately when you’re retired b/c you should be out there actively seeing the world and doing stuff outside of the house!
You are absolutely right about this.Living debt free sounds difficult but if you have some financial discipline you can achieve this.And you get so much more freedom and confidence…..
People should focus on one thing:only spend what you can affort.Nothing more and nothing less…So simple but like you said people are used being in debt.
Debts are usually of the main reasons people have financial problems. Cutting them short as soon as possible is probably the best thing to do to make our retirement goals more and more achievable. I?m sure it is possible to still have a lot of fun in the retirement days without aiming for very high monthly payments. I agree that such ambition may actually hinder the process of saving.
Marty – Debt has to be viewed as yesterday’s mess, and it needs to be cleaned up (paid off) before moving into a period of lower income, such as retirement.
I just found your article unexpectedly from the search engine. extremely valuable content on retirement planning. Thanks for discuss this issue.
One thing that irks me is that most of the retirement information aimed the Boomer generation assumes that we are all wealthy and living the life of the rich and famous.
I regularly see ‘retirement’ communities advertised for $250.000-$1,000,000 and although that may include amenities like a clubhouse/pool or even a golf course. it may not include utilities and it certainly doesn’t include any sort of medical care or home care.
I don’t see anything aimed at the middle or low middle income sector. The very poor can get subsidized housing but it seems the media,especially thinks we are all either rich or dirt poor and that isn’t the truth. Most of us are somewhere in between; from just hanging on to very stable if no catastrophe hits the economy or our life.
Who pitched the idea that everyone born past WWII into the early 60’s is wealthy? Get real, please!
Hi Mary – That’s one of my pet peeves with retirement. You’re absolutely right, all of the advice is aimed at people who are very prosperous. Of course the reason is financial – you don’t make money advertising products and services to people who are just getting by, but to people who have plenty of money to spend and invest.
The reality is that 90% of the population will live in the retirement years just the way they live now – struggling to survive. That’s the audience I try to write for with my retirement posts. I’m not aware anyone else is writing to that group, which is comprised of totally normal people who represent the overwhelming majority of Americans. There is one exception, which is Charles Hugh Smith at OfTwoMinds.com. He says that objective isn’t to comfortably retire, but to work comfortably (if I’ve quoted that correctly). And I agree, most Americans will continue to work during their retirement years. But the people I know who are still working past 65 mostly seem happy. You won’t see anyone reporting that or seeing any virtue in it. It’s really sad that wealth is considered the primary criteria to judge people right up to their dying days. What have we become as a culture???
I wrote letters to our local “Boomer” and 50+ magazines to please consider that most Boomers/50+ are not wealthy or even close and to perhaps consider us in their articles. I also mentioned that most of us won’t end up in gated retirement communities nor would many of us wish to.
Even some of the Boomers that were fairly prepared for retirement lost a good deal of their nest eggs in the 2008 financial meltdown. I have a friend that that happened to. The ONLY people I know who are totally prepared for retirement financially are those who inherited money and/or property.
I may inherit some property and a house that is all paid off and will allow me to live so that my only bill will be utilities and any medical bills. I am currently paying down debt (the biggest being an old student loan not credit debt. My credit debt is manageable and will be paid down 100% within the year.)
I am looking into online work and money sources and plan to pursue that after I retire.
I don’t now and have never given a fig about new cars, the latest fashions, fancy amenities,impressing the neighbors,etc.(although a pool would be nice as I LOVE to swim) so that aspect of debt has never hit me.
My only big splurges are things having to do with photography and I don’t do much splurging there. I do eat out from work too much but it’s not boredom that drives that: it’s the fact that I am too tired when I get off work to fix anything resembling a healthy, tasty meal. I am 65 and working and have health issues that also drain my energies. My health may force me to retire onto disability if it doesn’t improve soon.
And I agree totally; our society is screwed up. The gods of our age are money and celebrity and instant gratification. We need more Jesus and less me-me-mesus.
Very well put Mary! The only people who have the TV version of retirement are the ones who were rich before they retired. And even a lot of those continue to work – almost always if they’re self-employed. I think what’s being promoted is a certain type of retirement that isn’t even common among the well-to-do. If you think about it, even if you’re rich, you start depleting your assets when you stop working. This is even more true in the zero interest rate environment we’re in, where you can’t get any income on your savings.