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?