Last week, I got an interesting comment on my July cash flow update.
“I like how you don’t seem to compromise quality of life for over-frugality!”
This comment is interesting because quality of life is so subjective. We spend about $4,500 per month and that’s a very comfortable level for us. However, this level of expenditure is unthinkable to many middleclass families. I’ve seen comments complaining that it’s unrealistic to live on less than $100,000 per year, for example. On the other hand, I know other families who spend much less than we do. Justin’s family at Root of Good spends about $2,700 per month and they live a very comfortable lifestyle. Of course, they live in North Carolina which has a lower cost of living than Portland.
Personally, I feel we spend a bit too much money. We can definitely cut back if we need to. About 50% of our monthly expense is due to housing. Once we pay the home off, our monthly expense would drop quite a bit. We could also reduce our discretionary spending like travel and eating out. Oh yeah, we only have one more year of preschool left. Once RB40jr starts kindergarten, we won’t have to pay for childcare anymore. Although, I hear there will be other expenses cropping up as he gets older.
Yes, it’s tougher to cut back as a family. If I was single with no kid, I’d probably live very simply like my brother does. He lives on about $1,250/month in Silicon Valley. That’s really cheap considering he is in one of the most expensive areas in the country. (#4 most expensive city in the US according to Kiplinger.) I guess I’m a miser at heart. Overall, I feel like we are at a comfortable level, but could cut back if required.
This level of spending is about the same as when I was working full time. We didn’t have to downgrade our lifestyle after I quit my full time job. However, it has only been 3 years and my retirement could last 40-50 years. Most retirees won’t run into trouble right away, but they’ll start to see some problems as they age and spend down their nest egg.
Avoid downgrading your lifestyle after retirement
My biggest fear in early retirement is running out of money. In reality, we won’t run out of money completely. If we see our retirement fund depleting faster than expected, then we would compensate by reducing our living standard. Hopefully, that won’t happen, but that’s what 50% of Americans will face in retirement according to the National Retirement Risk Index.
This is not surprising because our national saving rate is pretty dismal at around 5%. Even if you’ve been diligent and save 15% of your income, it would take 40 years before you can accumulate enough to fund a comfortable retirement. If you neglected to save in your 20s, had a divorce, or had some big medical expense, these factors can easily interrupt your retirement saving. No wonder, so many Americans are heading toward a lifestyle downgrade.
We all dream of traveling, picking up long neglected hobbies, and enjoying life in retirement. All this might not be possible if you can’t pay the bills. So how can you plan ahead so you can maintain your lifestyle in retirement? Here are 3 ways to avoid downgrading your lifestyle after retirement.
1. Work Longer
The obvious answer is to work longer so you can shore up your retirement fund. That’s what many financial advisors recommend. This is an early retirement blog so I can’t recommend sticking with your full time job for 4-5 more years as the solution. There is no way I could have done that with my old stressful job. The alternative is to work part time or become self employed. That’s what I’ve done and my quality of life improved tremendously. Even if you’re financially secure, it is still good to work a little bit to keep life interesting. If you find a way to make some income doing the things you enjoy, then that’s your ticket to early retirement.
2. Save More
Saving 10-15% of your income really isn’t enough. If you want to retire early, then you need to save a lot more. What if you can save 50% or even 70% of your income? Your retirement saving will get a big boost and improve the compounding effect. Just as important, you will put an artificial cap on your monthly expenditure. By saving more, you will keep your lifestyle in check. That’s exactly what we did and it enabled us to maintain our lifestyle when I left my full time job. We could have spent $10,000 per month to live a more luxurious lifestyle, but we choose to live a moderate lifestyle instead so I could retire early.
Note that saving more doesn’t mean you have to live a frugal lifestyle. You could focus on making more income also. If you can increase your income and maintain the same lifestyle, then you’ll be able to save more.
3. Think Creatively
Lastly, you should think creatively about retirement. There are many ways to maintain your lifestyle with a smaller budget. One option is to move to a location with a lower cost of living. That’s why Florida is such a popular retirement destination. There is no state tax and the cost of living is much better than up north. Moving overseas is also becoming more popular with retirees. You’ll get to explore other parts of the world and you can live comfortably on a smaller budget. Relocation isn’t really an option right now due to Mrs. RB40’s job, but once she retires, we’ll take a look at that option again.
Relocation is just one of the things you can do. I’m sure most families can trim their budget without compromising their lifestyle much. Do you really need 200 channels when you only watch the Games of Thrones? How about that gym membership to the gym you never go to? You could learn to cook other cuisines instead of going out to eat. Most of us are just too busy to be more efficient. Can you bike and take public transportation instead of drive? How about searching for cheap fun activities to do instead of going to expensive concerts and shows. In retirement, you’ll have more time to think about ways to save money without compromising your lifestyle.
Will you have to downgrade your lifestyle after retirement? What are you doing to avoid it?
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.