Use these 3 strategies to shave 70% off your supposed retirement savings.
Your retirement savings target (your “number”) is less than you think you need.
In 2019, personal finance guru Suze Orman announced you need $5 Million to live a happy retirement.
That’s wrong, wrong, wrong, wrong, wrong. Very wrong.
Suze is misinforming those of us working hard to achieve financial independence.
In this post, I will show you how to shave $3.4 Million off this misguided $5 Million savings target. All you must do is 1) Review your large expenses, 2) Turn your hobby into a micro-business, and 3) Invest smarter.
Before we dive in, think about this:
“How much longer would you need to work to save an additional $3.4 Million dollars?”
I hope the answer is “far too long to even consider it!”. In fact, it’s likely not even possible for most of us.
First, let’s clarify a $5 Million retirement.
The often-used 4% rule translates $5 Million of retirement savings to living on $200,000 annually for 30 years. (More on this 30-year timeframe, later).
Next, we can reduce this $5 Million savings target by ~70% using three strategies.
To do so, we’ll build a case to adjust needing $200,000 annually. Then, we’ll back into the reduced savings target. And, we’ll do this all without sacrificing quality of life in retirement.
#1: Investigate large expenses to reduce spending
What is the best way to reduce the income needed in retirement? The best way is the most direct way: eliminate unnecessary living expenses.
Please take note! This is not an act of frugality or meant to reduce your quality of life in retirement. I’m willing to bet that you can comfortably live on 20% less. Let’s shave off $40,000 in spending without feeling it.
Exercise #1:
Look at your annual expenses and do the necessary work to curb your spending. Start with the big expenses: home, car, and health. Can you refinance your mortgage? How about selling a car and biking instead? Have you signed up for a subsidized Affordable Care Act (ACA) health plan at healthcare.gov?
Exericise #2:
Imagine you are an entrepreneur, and it is “Day 1”. Assume that you can only afford 25% of what you had planned for. In this scenario, your $200,000 annual spend becomes $50,000. What unique changes can you make? This exercise results in extreme ideas that you could later change to be less severe.
Exercise #3:
Learn from others who have come before you. Here are 10 ideas that members of the Fast Follow Investor community have shared with me. You need NOT downsize your home, reduce the # of vacations you take, or eliminate a daily coffee habit!
Instead, you might:
- Cancel subscriptions that you no longer use - save $1,000 each year
- Eliminate or reduce insurance premiums (life, long-term disability, auto) - $10,000
- Read/listen to books using Libby instead of purchasing on Amazon - $1,000
- Program your thermostat and lower the temperature on your water heater - $3,000
- Ask for coupon codes via a company website’s chatbot before buying online - $1,000
- Transition to one car and save on maintenance, licensing, and insurance - $6,000
- Switch to a subsidized healthcare plan through healthcare.gov - $10,000
- Refinance your mortgage - $3,000
- Stop supporting your kids (cell phone bills, bank overdraft fees). They are adults now. - $1,000
- Commit to “wait one week to buy” after placing an item in your Amazon shopping cart - $4,000
Total annual savings: $40,000
And don’t fret about inflation. Even with inflation, studies show that the average retiree’s spending drops by 25% for every 10 years in retirement. If you retire early, you should adjust that assumption. But, in case you don’t believe me: think about how much your 85-year-old mother spends on travel, for example. Spending in real terms declines as you age.
Calculation:
($200K less $40K saved = $160K needed)/4% = $4M savings target, updated.
With reduced spending, we are now living a $5 Million retirement on $4 Million in savings.
That’s $1 Million less savings required! How many fewer years of work is that? 10 years? More?
But we can do better…
#2: You will want to stay busy, so get paid for it.
Any income earned in retirement is that much less you need to save!
I often hear this concern: “But wait, if I’m working then I’m not retired.” Yes and no. It depends on how you’re earning this retirement income. Also, after relaxing in retirement for a while, you may realize you need some purpose back in your life. Earning money on your terms this time is a way to get it. For example, why not work a few half days at a local cafe? It’s a great way to stay connected with friends and the community.
My grandfather and my father-in-law both worked in retirement for reasons beyond money.
- My grandpa Kenny’s career as a plumber lead him to work as a sales associate at his local Ace Hardware. Before taking the job, he confided in me about his boredom: “Brian, I can only rotate the wheels on the vacuum cleaner so many times.” At Ace Hardware, he helped customers find what they needed. But mostly, he loved chatting with them. My grandpa was an expert joke teller.
- My father-in-law, Robin’s situation was similar. He loves golf. Robin works several days a week now as a starter at his favorite golf course. He jokes with the golfing regulars all day. He spins his yarns. And he gets a paycheck. And free golf!
I can think of several options for making money when retired.
- Rent out that extra room in your basement. Or, if you travel for part of the year, rent out your house during that time.
- While very few kickback permanently in retirement, it’s especially true of early retirees. Those quicker to find financial independence are especially likely to pick up a new job or career.
- Do you like people? Work part-time at your favorite coffee house.
- Do you like books? Work at the library.
- Are you fortunate enough to have seasonal skills? A retired accountant could pick up work during the busy tax season, then be off in time for the summer.
- Do you like your former colleagues? You could consult with your former employer for part of the year.
- Perhaps you have a hobby or passion project. Find 1,000 true fans and watch the money roll in. My uncle-in-law, Howard, is the foremost expert on Mazda RX-7 and RX-8 cars. He’s an absolute true fan of the Rotary engine. And he’s an expert. Each year, Mazda RX fans spend oodles of time and money working with Howard.
The options are endless.
Here are a few opportunities that add up to $80,000 per year:
- Put your house on Airbnb or VRBO. Rent it out during an extended trip you take to earn $10,000.
- Do seasonal work or part-time consulting. Charge $15,000 for each of the 3 months and earn $45,000.
- Monetize a hobby or passion. Sell $250 worth of something to 100 true fans to earn $25,000.
Calculation:
($160K less $80K earned = $80K needed)/4% = $2M savings target, updated.
With some income in retirement, we are now living a $5 Million retirement on $2 Million in savings.
That’s another $2 Million less savings required! Wow. Let’s find more…
#3: Maximize the withdrawal rate on your savings
The final strategy is the easiest to implement. You need not cut spending or monetize hobbies. Instead, just invest your nest egg smarter.
Let’s revisit the 4% rule that I used earlier. The rule first appeared in 1994 after studying a 60%-40% U.S. stock-to-bond portfolio over different 30 years periods in history. But, using a 4% safe withdrawal rate (SWR) is inaccurate for two important reasons.
- It is based on an inferior investment strategy (60/40). You can invest for greater return and less risk.
- It is timebound to 30 years. What if you want to stay retired for 35 years? 50 years? Or longer?
Instead, let’s use 5% as the corrected, perpetual withdrawal rate (PWR). To do so, the Fast Follow Investor strategy is necessary. I break it down further in this [post](to update with SWR/PWR post).
So, our $80,000 annual income in retirement no longer requires $2 Million in savings.
Calculation:
$80K needed/updated 5% withdrawal rate = $1.6M savings target, updated.
This is $400,000 less savings required.
In total, the three strategies reduced our retirement savings required by $3.4 Million.
So there you have it: with a little work, your $5 Million nest egg need only be $1.6 Million!
$1.6 Million still requires work to build. To do it, I urge you to follow the Idols Framework for smarter wealth creation. But it is calming to know you needn’t stay in your job decades longer to save an unnecessary, extra $3.4 Million.
Please, do this analysis for yourselves!
I suspect many of you reading this are financially independent NOW. But, you may not have realized it. Make the jump. Take the plunge. You can do it.
Tweet
Subscribe to get my posts sent to your Inbox. Thanks!
What is Fast Follow Investing?
Start with buy & hold passive indexing. Then, expand beyond stocks and bonds & cut off severe market losses at the knees. Grow your lifetime savings at 12% to enjoy a 5% forever rate of withdrawal in retirement. Fast Follow Investing (based on Tactical Asset Allocation) is finally here for small investors like you and me. So join me!
