One of the hallmarks of a solid early retirement plan is thinning out your expenses as much as possible.
To a lot of people they will probably interpret this to mean shaving a few hundred bucks off by not eating out every night or scaling back on their trips to the mall. Those kinds of things are good, but we’re talking about going a whole lot further. For someone who wants to retire early really, really badly, part of what they’ll do is clip back their expenses to the point of virtual non-existence.
Why would they do this? Simple. The fewer expenses you have means you’ll only need the minimum retirement savings possible. Take for example everyone’s favorite super-frugal early retiree Mr Money Mustache. I remember reading that one of the ways he was able to pull off his mega-early retirement was by cutting his expenses back to $2,000 per month. By doing so meant that he had a target of saving only $600,000 for retirement (see below to see how to calculate this).
While early retirement sounds wonderful, this gets me thinking: What’s the least amount of money I would need to retire? Would living off of this minimal retirement income even be reasonable or (better yet) worth it? Let’s explore this further.
How to Use Your Expenses to Figure Out Your Minimum Retirement Savings Target:
Now that I have my first client for money coaching, I’m finding myself going back to the basics of money management to structure a good financial plan. And as you can guess, that plan is going to include figuring out the minimal amount of retirement savings we’ll need to strive for.
Do you know how to figure this out? It’s not hard to do at all:
- Take your average monthly expenses. Every time I do this for myself I always use $5,000.
- Multiply that number by 12 to get your annual expenses. 12 x $5,000 = $60,000.
- Multiply that number by 25 to get your target retirement savings. 25 x $60,000 = $1,500,000
(Why multiply it by 25? Because multiplying your expenses by 25 is basically the same thing as taking your retirement savings, $1.5M and taking 4% out of it every year for living expenses. 4% is considered by many people to be the safe withdrawal rate for making your life savings last a long time.)
For years I’ve used that $5,000 as my retirement savings target because that’s approximately how much we spend now.
But $1.5 million? Come on! That’s a lot of dough to save up.
A lot of times my wife and I will joke that we’re going to quit our jobs and live “the simple life”. We’ll say ridiculous things like “we’re not going to spend any more money” or “we’re not going to ever buy anything again”.
Even though we’re mostly joking, there could be some seriousness to those actions. What if we really did want to retire tomorrow? What kinds of things could we be doing right now to get our expenses as low as possible so that we would not need so much money for retirement?
Let’s run through my monthly expenses and see where we could make some improvements:
Killing off your mortgage would probably be one of the biggest things you could do to reduce how much money you’ll need during retirement. But keep in mind that even if you’re lucky enough to have the house paid off, you still have to deal with things like property taxes and home owners insurance.
Right now my monthly breakdown is $1,150 which is about $850 for principal and interest, $185 for taxes, $50 for homeowners insurance, and $65 for PMI. So my best case is if I paid my mortgage off early, then I’d only need $235 per month for taxes and insurance.
Cars are easily one of those expenses that are hard to wrap your head around. So many things could go wrong. Even if you buy used and try to be frugal with them, they still break down and need regular maintenance.
My wife and I are both pretty independent and we both drive. So we’d have to factor in expenses for two cars. I’d say that between a few modest car payments ($200), fuel ($300), and insurance ($100), we’d probably be looking at $600 per month.
Power / Heating:
Our power and heating bill tends to stay around $250 per month. Unless you move to a smaller house or purchase more energy efficient appliances, there’s really not much more you can squeeze here.
You don’t really need a land-line anymore. An inexpensive family phone plan can be purchased for around $120 per month.
TV / Internet:
Cable is nice, but you don’t really need a full cable TV package. Comcast has an online plan that is similar to Hulu or Netflix. If all you purchased was the Internet and a really small cable-alternative package, you’d probably be looking at $60 per month.
This is the tricky one. No matter if you use ObamaCare or whatever, medical insurance costs can impact your retirement expenses in a big way. Depending on which kind of package you want, there is probably a wide range of prices that this could end up costing. To keep it simple, let’s go with $500 per month for this one.
Food and Living Expenses:
Where to even begin here? A lot of people would probably get pretty cocky here and say they could survive on $200 or something really small like that. But let’s be realistic – even if we’re being frugal. I would actually venture to say $1,000 is probably more accurate; even if you are being modest.
How Far Down Were We Able to Get Our Retirement Expenses?
In case you weren’t keeping track, here’s the complete tally. Not too bad!
To be honest I was surprised to find that our minimum living expenses were reasonably low in comparison to the $5,000 figure I usually use. Of course its not like I’m going to get to retire tomorrow. In reality I’d probably find a budget like this pretty tight. But it could work! I guess it’s all about trade-offs – what are you willing to sacrifice for an early retirement?
The caveat to these expenses is of course that I don’t really have my mortgage completely paid off (yet). Nor are my cars or other debts erased. If I ever really did want to move ahead with a plan like this I’d have to (of course) massacre all my debts in order to make this work.
The good news however is that we’re already reasonably close to this minimum retirement savings goal of $830K we just calculated. Though it wouldn’t be tomorrow, it is nice to know that savings-wise in a few short years we might be where we need to be in order to make this a reality.
Readers – What’s the least amount of money you believe you could comfortably live off of? How much does that calculate out to in terms of the minimum amount of retirement savings you’d need?
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