Lowering Your Expenses

Being more frugal does not necessarily mean cutting back or denying yourself certain luxuries.  Most of the time it simply involves the act of tightening up your finances and working down your expenses.

For example:

  • Could you have your house paid off before you decide to retire?  If you’ve got a $1,000 mortgage payment every month, eliminating it would slash $12,000 from your annual needs.  That’s $300,000 less to save up in your nest egg!
  • Could you drive your car for an extra year or longer?  Or buy a used car with cash?  If you can afford to avoid a $500 car payment, that will save you an extra $6,000 per year.  Again, that’s another $150,000 less you need to save!
  • Can you cut down on your household energy costs?
  • Get a cheaper cell phone plan?
  • Get a better price for your insurance coverage?
  • Find a cheaper health care provider?
  • Eat for less?
  • Drive for less?
  • Buy fewer clothes?
  • Hold out a little longer to get the latest gadget?
  • Scale back your discretionary purchases?
  • Negotiate lower rates for you bills?

And many others!  Finding creative ways to save money is something that I feel so strongly about, I used it as the central theme for one of my ebooks “Save MORE, Earn MORE”.

What You Should Do

Go back to the retirement plan that we wrote out earlier in Chapter 2 and think about how you could have some more fun for less.

  • What would be some of the activities that you get involved in?
  • What sorts of things would you find value and enjoy learning?
  • What could you be doing to improve your health and psyche?
  • How can you give back to yourself, your family, and your community?

Think also about some of the ways that you could strategically cut back on your regular, everyday expenses to try to squeeze more out of your bills.

Put this all together and come up with a new retirement income goal.

Is this a number that you could truly live with?

Finally, talk openly about your plan and everything it entails with your spouse.  In order for it to work, the two of you both need to be on board and work together as a team.  Be honest with each other and discuss what each person’s vision of the future may look like.

Remember: Similar to Chapter 2, the goal is not to slash your needs and drive this number down as low as it can possibly go.  It’s simply to consider if there is any opportunity for optimization that you may not have previously considered.…

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How Early Retirement Bloggers Live On Less

Many of the top early retirement bloggers were successful not because they acquired millions of dollars in some extraordinary or unique way.  They were able to do it because they simply found a way to not “need” as much money as the typical person.

One very extreme example of this is Jacob Lund Fisker from the website and best-selling book Early Retirement Extreme.  Jacob was able to retire before the age of 30 after only 5 years of working by getting his annual spending down to below $10,000 per year.  Knowing what we know about the 4 percent rule, a retirement income like this would only require a mere nest egg savings of $250,000!  Though his approach is certainly not for everyone, it illustrates the extent to which a lower income need can affect your overall plan.

Another good example is the blogger Mr. Money Mustache (real name Peter Adeney).  MMM (as he’s called) is another popular retired-by-age 30 character that publicly boasts about enjoying an annual budget of just $24,000.  His retirement only required a savings of $600,000 to pull off.

Along the same lines are Jeremy and Winnie from the website with the unusual name Go Curry Cracker.  They too utilized the 4 percent rule to retire in their 30’s with $40,000 per year in anticipated expenses.  However, they make their dollars stretch farther by living for extended periods of time in places with lower cost of living than the U.S.

One of my favorite examples of a successful early retirement is that of Robert and Robin Charlton from the book “How to Retire Early”.  They were able to save almost $1,000,000 from scratch in just 15 years and retire before age 45 with a projected retirement income of $40,000.

There are many, many other examples of other bloggers who have used similar strategies.  The forum Early Retirement.org also has thousands of stories from people who have either achieved financial freedom or are on their way there.

Redefining the Word “Fun”

A lot can be done with less than you think.  This is especially true when you read through many of the articles from the early retirement blogging community.

As you really analyze their stories and listen to their philosophies, you come to understand that part of what helps make each of their plans a success is all in how you define the word “fun”.

Often you’ll hear them redefine fun as:

  • Traveling to exotic, lower cost of living locations
  • Spending time with family or friends
  • Taking their time to accomplish projects around the house
  • Being active outdoors
  • Volunteering
  • Playing a sport they like
  • Learning a new hobby
  • Tons more!

If your definition of fun is spending is buying the latest gadget, dining out to an expensive meal every night, and traveling to exotic resorts, then that’s fine.  Again, your retirement should be designed for you and no one else.

But understand as a result you’ll be faced with a much steeper challenge.  The math simply doesn’t change.  If we generalize that you think you’ll need a generous $200,000 of retirement income per year, then the 4 percent rule quickly shows us that you’ll need a whooping $5 million for your nest egg.  Are you prepared to make that happen?

Spending Changes As You Age

Even though we’ve been using a “fixed” figure for our retirement income in nearly every example, it may be useful to know that this may not be the case.  According to David Blanchett from Morningstar, inflation-adjusted spending in retirement gradually decreases over time (unless health-care costs cause it to rise again in life’s final years).

He quantifies this as follows:

Households spending $50,000 at age 65 decrease their real spending by about 15% by age 80; the drop hits 20% by age 85.  For those spending $100,000, it’s 20% by 80 and nearly 30% by 85.…

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Optimizing Your Retirement Income Needs

When it comes to your retirement income needs, coming up with the  “number” of what you need for retirement is paramount.   This figure was meant to be some guess at how much you’d need each year to cover your expenses.

We’re going to revisit that topic.  And as you can probably guess, there’s a good reason to do so.  After an exhausting discussion of safe withdrawal rates, one thing should be clear to you:

No matter which one you choose for your plan, every dollar you think you will need for retirement will be an amplification of what you will need to plan to save in your nest egg.

Think back to our simple retirement equation.  The math is easy to see!  Take the 4 percent rule for example:

Every $10,000 extra of retirement income that you think you will need will cost you the time and energy to save up an extra $10,000 / 0.04 = $250,000 in your nest egg.

So why not be strategic?  Let’s turn this concept around and use it our advantage!

For every $10,000 of retirement income that you can afford to do without, that’s $250,000 less that you need to save in your nest egg.

It’s true!  We’ve been generically using $50,000 in every example so far as our target retirement income.  But could you be just as happy with $45,000 or $40,000?  What about even less?

Crunch the numbers.  A retirement income target of $40,000 using the 4 percent rule drops our nest egg savings target down from $1,250,000 to $1,000,000.  Considering how many years of saving that could knock off of your plan, I’d say it’s worth looking into.

Addressing a crucial decision that lies before you: How much money do you think you will need for retirement?

When you consider all that you will need with your retirement, annuity selling should be on your list of options to consider. Especially with the current level of interest rates, their historical lows and not much optimism of them going up any time soon.

Though initially, you might have your doubts about being able to live on less, it might be beneficial to know that this concept of reducing your expenses is the cornerstone of many successful early retirement strategies.  Have a look for yourself!

What Should You Know About an Annuity

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