Save. Save. Save.
Invest. Invest. Invest.
Sometimes it feels like that’s the only real retirement advice out there.
It’s good advice, to be sure. But your long-term retirement goals don’t have to be based just on hitting one big number.
When you think about it, it makes sense that a lot of investors and future retirees look at it that way.
It makes the goal more measurable.
If you know you have to hit $1 million in assets to retire, every account statement becomes a scorecard that tells you how close you are to achieving your goals.
And if you’re pursuing a FIRE (Financial Independence, Retire Early) strategy, having one big number in mind is pretty much baked into the cake: FIRE adherents call it their “FIRE number.”
(Side note: For the FIRE crowd, the retirement target is going to be much higher, say $2.5 million or $4 million in liquid assets, depending on the retirement lifestyle they have in mind.)
But that one big number is only half of the story.
The other half is how you plan on spending your money in retirement.
Saving a few dollars a day in retirement can have a much bigger impact on your retirement plans than you might expect.
How Changing Your Spending Habits Can Add a Year (or More) to Your Retirement
To demonstrate that, I want to walk through an example that shows the impact of something relatively straightforward: whether you buy a new car.
[text_ad]
The New Car vs. Used Car Example
Let’s assume you’re a married couple that is planning to collect the average Social Security for married couples of $38,209 each year.
We’ll also assume that your retirement goal is $1 million in invested assets (mostly because it’s a nice round number, plus, who doesn’t want to be a millionaire).
Well, if we use the 4% rule (where you can safely withdraw 4% of your invested assets in the first year of retirement and then adjust the total up each year based on inflation), that would give you $40,000 in income from your investments.
That gives you a total retirement income in year one of $78,209.
$78,209 is below the average retirement income for a couple (just over $100,000 but skewed by high earners), but it’s above the median retirement income for a couple of $72,800.
Now, let’s assume you choose to buy a new car.
The New Car Math
The average monthly payment for a new car these days is $767 (ouch!), which translates to $9,204 per year.
So, net of your car payments, you have $69,005 in annual income ($78,209 - $9,204 = $69,005).
You can enjoy a comfortable retirement on that income (especially if your primary residence is paid off), and even with the new car, you’re still collecting almost as much as that median retirement income figure.
But what if instead of fixating on that $1 million retirement goal, we focused on reaching that income level instead and set a new target based on what it would take to achieve that?
We’ve already done the math for a new car, so let’s do the math for a used car instead.
The Used Car Math
The average used car payment is $537 per month, which is $6,444 per year.
So to achieve the same $69,005 in annual income (net of car expenses), we’d only need to earn $75,449 from Social Security and our investments ($6,444 + $69,005 = $75,449).
If we back out our Social Security income of $38,209, that means we need only $37,240 ($75,449 - $38,209) in investment income.
If we apply the 4% rule and calculate our retirement assets based on $37,240 being 4% of our total investments, we don’t need $1 million anymore.
Now, we only need $931,000 ($931,000 x 4% = $37,240).
In other words, the amount of invested assets you need to retire with the same income drops by $69,000 if you choose to drive a used car instead of a new car.
But what does that mean in practice?
Adding It All Up
Well, $931,000 needs to grow by 7.4% to reach $1 million, which is awfully close to the historical one-year returns of large-cap stocks.
Put one way, you could keep working for another year to drive a new car in retirement.
Put another way, choosing to drive a used car could buy you a full extra year of retirement.
The difference between the new car at $767 per month and the used car at $537 per month is only $230, or about $7.67 per day.
For $7.67 per day, you get to retire a year early.
We worked through the car example because it’s straightforward and doesn’t require any budgeting that might be unique to your situation.
But there are countless small tweaks you can make to your expected budget to save $7.67 a day, and that’s all it takes (in our scenario) to retire a year early.
The important takeaway isn’t whether you drive a new car or a used car; it’s that saving your way to a specific target is just one lever you can pull to achieve your goals, and adjusting your spending is just as powerful a lever.
That kind of holistic approach to finance – saving more, maximizing your investment returns, and spending less – can be tough to capture on a spreadsheet or see in your account statements, but it can make a meaningful difference in your life.
It’s the approach that Nancy Zambell takes in Cabot Money Club, where she helps subscribers put their money to work intelligently while also identifying opportunities to spend smarter.
And right now, she has a special offer for new subscribers to Cabot Money Club.
For less than 25 cents a day, she can help you invest for a richer retirement and save money to reach that finish line faster.
[author_ad]
