Ever heard a Financial Planner or read an article that said you should stop going out for coffee every morning and instead invested that $3 for your retirement?
I did the math, and if you started doing that when you were 35, and earned a 7% rate of return, you would have just over $100,000 by the time you turned 65. $103,435, to be exact.1
Now $100,000 is certainly a lot of money, (it will be worth a lot less 30 years from now), but it will hardly pay for your retirement.
I see this sort of thing all the time, and I’m sure you do too. A lot of Financial planners attempt to control the smallest items in your budget while ignoring the largest expenses that most people have, which are taxes, housing expenses, insurance, and debt.
Now I’m all for budgets, but before we go too far sacrificing our current lifestyle and enjoyment for our future retirement lifestyle, lets take a little deeper dive into some of those larger expenses.
For many planners, saving money for retirement is all about sacrificing your current lifestyle that you have today. Even when they look at your budget, they assume all of those big expenses are fixed, that there is nothing you can do about them. So they focus on discretionary spending, tell you that you need to cut back on going to dinner, or play less golf or don’t go to the show as often or skip a vacation.
Everything is sacrificing today for the future, and you end up waiting. For many people, they can’t wait to retire so they can finally do some of the things they waited their entire life to do. Kind of sad when you think about it.
Now don’t get me wrong, there are definitely people that are spending too much money on todays lifestyle, and probably should cut back. But for many of us, we have some of those big expenses. The big 4 as I like to call them, taxes, housing, insurance, and debt.
For example, I don’t think most people have a real tax strategy, although it’s probably your single largest expense. Even if you have the best accountant, many people do little or no tax planning during the year. They simply drop off their tax documents in April and say “here, do my taxes”. By the time the calendar year ends, there is very little that you can do to change the outcome of your taxes.
Housing is another big one. I am always amazed at how big of a loan a bank will give someone. Many people find themselves in this position, where their mortgage payment is sucking up a disproportionally large amount of their take home pay. Remember, the bank knows that you can afford it, even if its means skipping most entertainment, vacations, and foregoing any long term savings towards your retirement.
Insurance is another big expense for most families and I think very few people really take the time to understand what they are paying versus what they really need. Many people never really shop around, or they just assume what they are paying is fair. For example, I think many people believe that buying life insurance through their employer is a good deal. After all they must be getting some kind of huge group discount, right? What I have found, is that especially after age 50, many people are able to replace their employer group policy for less money, if they are healthy, and don’t have any pre-existing conditions.
Finally debt, Debt can be a big one for some people. How you manage debt can have huge impacts on your cash flow. Do you carry balances on credit cards, still have student loans, or a big home equity loan? You need to develop a debt pay down strategy to work towards paying those loans off as quickly as possible. I developed a strategy to help people pay down debt, using something I call the cash-flow improvement score.
In summary, saving money for retirement doesn’t always have to mean sacrificing today’s lifestyle, in order to save for tomorrow.
1. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.