Can Frugal Living make a difference in how soon you retire or is it just a waste of time? We’re going to give you one example of the power of frugal living as it specifically pertains to how soon you can retire.
How Much Money Do You Need to Retire?
First, let’s calculate how much money you need to retire for a moment.
Most retirement planning projection systems don’t adequately show the impact of frugal living in retirement estimate calculations—probably for good reason. Most people aren’t frugal!
However, the average person has rarely been shown “The Power of Frugal Living” regarding retirement calculation below. You may become a convert to frugal living when you see how frugality speeds up your retirement plan.
A Retirement Rule of Thumb
The general rule of thumb in Retirement planning is to remember that for every $300,000 in investment savings you can safely expect to generate about $12,000 dollars in income.
The generally accepted safe withdrawal rate is 4% of your investment savings (I am currently challenging this “safe” assumption with other personal finance geeks throughout the country).
Four percent of $300,000 is $12,000 dollars.
Building Savings is a Huge Hurdle
It takes a long time to save $300,000 dollars for most people I know. The average person has a tough time saving $300,000 dollars over their entire lifetime. And the $1,000,000 dollars that many planners recommend is too huge a number to even consider.
Good luck saving $1,000,000 dollars if this is your main retirement strategy
How to Clear the Savings Hurdle
So, what do smart people do to jump over this hurdle? They clear this financial hurdle by implementing “The Power of Frugal Living” to support their retirement dreams.
Have you ever thought of eliminating $12,000 of your annual expenses instead of saving $300,000 dollars as a retirement strategy?
How long would it take you to find ways to reduce your expenses by $12,000 dollars?
What if you did this instead of saving the $300,000 dollars to generate $12,000 dollars in investment income every year?
My guess is that it is much more reasonable to reduce your expenses by $12,000 a year then it is to save $300,000 dollars.
This is a huge concept folks.
Take some time to think about the implications as it pertains to your retirement planning.
How Fast Can the Savings Add Up?
It may take 20-25 years or more for the average person to save $300,000 dollars that will safely generate $12,000 in investment income.
BUT, It may only take you a few years to get to the point that you’re you can cut $12,000 a year in expenses by getting out of debt.
Frugal Living Reduces Your Retirement Savings Goal!
Let me say this another way.
This means you can reduce your retirement savings goal (depending on your Retirement final income goal) by $300,000 if you can find a way to cut your expenses by $12,000.
Okay, you are probably rolling your eyes by now saying to your yourself “this guy is nuts”. “How am I going to cut $12,000 a year from my budget.” Don’t give up so easily! Have a little faith. You’ll get there.
Keep reading resources like MoneySmartFamily.com and take a look at their budget system – it’s a great way to manage your spending and cut expenses. Steve and Annette Economides are your retirement acceleration source.
Cut Your Insurance Costs
What if you could reduce what you pay for your homeowners and auto insurance? We’ve seen cases where families continually renew the same insurance policies year after year for 15 to 20 years.
Insurance companies are continually adjusting rates. One of the determining factors in rates is the individual company’s losses or profits in a specific zip code. If the company you’re with had a greater number of claims in your zip code they may raise your rates. But their competitor may not have had as many losses. There can be some real savings by quoting your insurance every couple of year.
At MoneySmartFamily.com we recommend using Gabi.com – they have a simple insurance quoting tool that is quick and easy. You’ll recieve multiple insurance quotes by just entering your information one time.
Here’s A More Reasonable Goal for Savings This Year
Okay, here is the compromise for you skeptics. Let’s reframe the expense savings bar a bit.
Small achievable steps work best in your retirement plan. Most people can cut their expenses through good planning by at least $4000 per year.
Things like re-quoting your auto insurance, cutting your cable TV costs and using NetFlix or Hulu instead, changing your grocery shopping habits, doing the holidays differently – these are all incredible ways to slash your expenses and generate savings.
If you can find ways to save $4000 this year, this means you can cut your Retirement savings amount by $100,000 dollars.
RELATED ARTICLE: Grocery Stores with Senior Discounts
The Coach’s Wrap Up
So, for every $4000 you cut in expenses, you won’t have to save $100,000 dollars in Retirement generating income. One more example and then we’re done.
If you cut $400 dollars in expenses this means you can cut your Retirement savings by $10,000 dollars. Okay, enough examples. I hope you see my point. Work on reducing your expenses and you have a much better chance of retiring on your terms.
Another excellent resource for frugal living and early retirement is our first book, America’s Cheapest Family Gets You Right On the Money, just click the words.
For additional encouragement to live frugally and retire early, check out our YouTube Channel.
We have around 200 videos that you can watch!
Action: If you want to calculate how much money you’ll need for retirement, try NewRetirement.com retirement calculator.
By Larry Weber – Staff Writer
About the author: Larry Weber served on the executive team of one of the largest public retirement systems in the United States for several years. He is passionate about helping people retire early by using frugal living strategies. He retired early himself by practicing what he preaches about frugal living. Larry is married with two grown children and volunteers as a personal finance and running coach in his spare time.