$1 in expenses saved saves $300 in the future

A few days ago, I saw this piece on CNBC. This couple retired at 38 in 1991 with $500,000 in savings. Here’s how their investments have lasted over the years. And I thought, dang, good for them! They’ve retired at 38 and stayed retired for 30 years. I’m already past 38 and not close to retiring.

They used the 4% rule (which was a good benchmark at the time). That rule says you can safely take out 4% of your assets every year when you retire. This will give you enough cushion to make the money last in retirement. This rule has been superseded by lifetime income annuities replacing the bond portion of your retirement portfolio. If you haven’t heard of Tom Hegna, I highly recommend learning more about him for retirement planning. You can read this piece to get his thoughts on annuities: Focus on Retirement Happiness to Make the Annuity Case.

See, the way an income annuity functions inside of portfolio is like a AAA-rated bond with a CCC-rated yield with 0 Standard Deviation. If you would simply replace the bonds in your portfolio with a lifetime income annuity, the risk of your portfolio will immediately be reduced and your returns will immediately increase.

Tom HEgna, Focus on Retirement Happiness to Make the Annuity Case

Most have a bad impression of income annuities. They can be complicated, but the underlying premise is sound. People with lifetime income live longer, live healthier, have less stress, and enjoy their retirements more. They are not afraid of spending their retirement assets, because they know they’ll get a paycheck, every month, every year. Our goal is to retire early, and eventually kick off income annuities to cover our basic needs.

Back to the CNBC piece. I thought, well how much will we need to retire? I created a retirement income calculator for that purpose. That CNBC piece sparked an idea. Let’s compare two best friends: Fraidy and Zany. Fraidy and Zany both need 4,000 a month to retire. Zany pays $200 a month for a car, and $200 in credit card debt a month. Annually, they both need $48,000 to retire. If we divide $48,000 by 4%, that gets us to $1.2 million in assets needed to retire. (4% of 1.2 million is $48,000, which is how much we can safely withdraw every year for retirement).

Retirement Income needed$4,000 for Fraidy$4,000 for Zany
Yearly Retirement Income needed$48,000 for Fraidy$48,000 for Zany
Assets needed to retire (Multiply by 25 times, or Divide by 4%)$1,200,000 for Fraidy$1,200,000 for Zany
Fraidy and Zany both need $1.2 million to retire

Zany had a zany idea (of course)! Zany said, what would happen if I paid off my car and got rid of my credit card debt? Fraidy said, I’m comfortable, I like switching cars every 3 years, and I’m okay with my credit card debt. Why bother, Zany? Zany decided to press ahead.

Retirement Income needed$4,000 for Fraidy$3,600 for Zany
Yearly Retirement Income needed$48,000 for Fraidy$43,200 for Zany
Assets needed to retire (Multiply by 25 times, or Divide by 4%)$1,200,000 for Fraidy$1,080,000 for Zany
Zany put in the work, reduced her debt, and now needs $120,000 less to retire, and can retire sooner

Zany decided to pay off her car, and work towards paying off her credit card debt. After 3 years, she was debt-free outside her mortgage. Congrats Zany!!! When Zany ran the numbers again, she realized she only needed $3,600 a month to retire, or $43,200 every year. Her reduced retirement needs meant she only needed $1,080,000 to retire, or $120,000 less than Fraidy (who lived up to his name of being afraid of change). Zany realized that the $400 saved in expenses every month directly led to needing $120,000 less in retirement assets. That means every $1 in monthly expense Zany saved led to $300 reduction in needed retirement assets. What a bargain, thought Zany! I need less money to retire, less years for the money to grow, accumulate less junk, and I can retire sooner. What a win. Fraidy saw Zany’s numbers and started putting together his own expense reduction plan.

The moral of the story. Don’t underestimate the power of reducing $1 on your expenses and future well-being. The equivalent is about $300 extra needed in retirement assets. Either save the $1 in expense or increase your income by $1 a month. For most of us, it’s easier and more satisfying to increase our income than to reduce our expenses. If you do decide to make more income, start investing early to help make that $1 grow into $300. I recommend reading Acorn Grow for ideas. I have realized cutting our monthly expenses is the right course, and have more vigor in growing our retirement assets.

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Thanks for reading!

Warmest regards,


Published by themandalorian

I'm the youngest daughter of smilingdad. I write about technology and helping people use it.

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