I have a personality and a mind that enjoys challenging the mainstream, status quo. If you read my blog, you know I offer opinions on things such as diversification, retirement, income and even home ownership that is not the mainstream views on these subjects. Part of this natural thought process is genetic for me, and I think part of it is that I have read with an objective mind many compelling arguments for such challenging views. The traditional savings and retirement equation needs to be challenged I think.
I’ve spent a great deal of time pondering saving, personal finance and the idea of early retirement recently. What has become apparent is how silly the overall retirement picture is for the majority of Americans. If you take a step back and think about it, we basically spend our entire life, saving way too little so that we can enjoy our older years with freedom. The funny thing is that our older years are often filled with aching, tired bodies and we don’t feel like doing much else than watching TV. We waste our best years sitting at desks in offices!
The other part that strikes me is just how much we overconsume during our “prime years” . The overconsumption naturally leads to undersaving. What if we were to flip this equation. What if we underconsumed and oversaved? Then, wouldn’t it mean that retirement comes earlier? Would you trade an expensive lifestyle now for more freedom, earlier in life and for a longer duration in life? Maybe.
History
If you look at history in the modern economy in our country, you will see a history of undersaving. Why else would we need to enact Social Security or Unemployment benefits? If we oversaved, we’d have plenty to retire on and we’d have a large cushion if something unexpected happened such as losing a job. Instead, our policies are to encourage overconsumption (in the name of economic growth) and undersaving (in the name of government dependence). Financial independence is something that politicians pay lip service to but nothing more. As financial independence continues to erode, the natural result is the growth of government. Growth of government always results in loss of freedom and liberty on the individual level. Over the coming years, if the stock market is ugly, you will see more and more leaders discussing 401(k) reform in an attempt to take over retirement funding completely (it’s already started).
What would be radical saving?
Most people don’t save anything. The “financially responsible” save somewhere in the 5-10% range. You can easily make an argument that 5-10% savings is far from enough to achieve the kind of retirement that they desire. Radical saving, the kind that can result in early retirement, must then be much higher than 10%. I think radical saving would be saving anywhere between 35-50% of your after tax income. Wouldn’t that be nuts!
Is it possible? Could you really save that much of your money? Of course you could. It would just mean having a drastically different lifestyle. It would probably mean renting a modest apartment or home, rarely eating out, owning one car instead of two, enjoying free quality time with one’s family instead of expensive entertainment, being extremely frugal with utilities and bills, etc. All of that is of course very possible, but rarely at best executed. There are two forces that work against this: 1) obviously a more expensive lifestyle can potentially be more enjoyable and 2) we feel the pressure of society and our neighbors to live like everyone else (also known as keeping up with the Joneses).
My saving situation
The interesting thing is that most people would at least consider this a decent trade off if they could be financially free and retire early (in their 40s, maybe 30s, or even better?). I know I would at least consider it and often still do. The forces working against me are 1) I “own” a home and am somewhat locked into the piece of real estate therefore it is tough to slash my housing costs, 2) I have a wife and baby and while I may be ok with cutting our lifestyle significantly, I have to consider my wife and what she wants (more important than money), and 3) I’m locked into a job at this point where I need a 2nd car.
In order to approach a solution, I should consider the following: 1) if i must stay in my house, look into a refinance to lower my mortgage costs. Also consider slashing utilities and bills such as cable, internet, lawn service, etc., 2) have discussions with my wife to find areas where we can cut back – the first one that comes to mind is cutting our gym membership, 3) keep pursuing a career where I’m either my own boss (start my own business) or reposition myself with my company where I have more flexibility and freedom and get past the regular 9-5 hours – maybe at this point, i can work remotely and get rid of a car.
Radical Saving & Reality
Even though it’s fun to think about the idea of slashing my living expenses by 90% and eating rice & beans every night all while putting away $3-4k each month in savings, I know this isn’t realistic. I have a wife that has needs and I definitely have a baby that has needs (diapers, formula, etc.). There are some costs that i won’t be able to slash. So, the goal then, for someone in my position is to find a compromise. As I mentioned above, the gym membership is a natural place (save $70/month). Maybe I get rid of cable ($100/month) and we rent movies and watch big games at a friends house. Maybe I share an internet connection with my neighbor (save $20/month). Food costs can easily be slashed since we eat out a decent bit – $60 for sushi isn’t exactly frugal. While we still have 2 cars, we can be much smarter about combining errands and cutting trips to save gas. I am considering buying a lawn mower and cutting my own lawn – ($100/month).
I’ve already listed several things that would result in saving several hundred bucks a month extra from where we are now and without altering our lifestyle significantly. Well maybe cutting our cable with be a pretty drastic change. But it’s still worth discussing.
The next step from here is focusing on income. I’m committed to finding new income streams and maximizing my current ones. Increasing income with decreasing expenses equates to some serious cash being built up in your savings. Throw in the potential for significant returns on your money that you save, and your financial picture starts to become beautiful. Your 20s are easily a time to execute some of these ideas. You probably have fewer ‘fixed” expenses then you will for the next 20-30 years (family mostly). Get a head start. Get 20, 30, 100, even 250k put away in your 20s. You wouldn’t believe what is possible. Question every expense and find new ways to increase your income.
This article was featured in the Money Hackers Carnival.
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Daniel | 16-Nov-09 at 3:50 pm | Permalink
How are you calculating after-tax income? Does that include Roth 401(k) contributions? What about FSA or pre-tax transportation benefits?
I am able to do this currently (saving well over 40% of my take-home pay, in 8 months it will drop to about 35%), but in a few years, I'm sure it will become more than impossible. For most people, saving that much is unrealistic. Unmarried people with no housing payment can do this (me), and married couples with no children and dual incomes can find ways to do this as well.
That's why saving in your 20s, while you don't have many fixed payments is essential. By getting ahead and saving now, we can set ourselves up for the future. I think 10K saved up a year is definitely possible, and everything else depends on family and work. Additional income streams just add to the potential savings.
20smoney | 16-Nov-09 at 4:07 pm | Permalink
If you have some pre-tax savings going on, you will need to re-calculate the savings rate. But, the savings rate itself isnt the key. More the money being saved.
Your comments are accurate, but I think its also part of the problem… the fact that we view saving this much as unrealistic for most people. I'm 27, have a wife and baby, and only have one income. It's unrealistic for me to save this much if I live like everyone else. The key is not to live like everyone else. Hard, yes. Do-able, yes.
It requires sacrifices but I think there are additional ways to boost lifestyle without spending money. I.e. going on walks with family, eating less expensive meals with friends, watching a game together versus going out to dinner several times a week, spending $50 at a bar with friends, going on lots of trips, etc.
Anything is possible but you can't have it both ways.
Moe | 16-Nov-09 at 9:12 pm | Permalink
So, here's a suggestion that might allow you to ramp up savings, even with a spouse and a child. I realize that some people truly can't afford to save 30%, but for others it becomes a question of lifestyle, as is pointed out in the post.
If you aren't currently saving at least 10% of your paycheck, work your way up to this– so that from your paycheck you spend 90% and save 10%. Most people will recognize that some form of savings is important, and few spouses will argue that you're saving too much by saving 10%. All money that I refer to as "saved" gets invested, not simply dumped into a savings account.
Now, once you're at 10% savings, write out your monthly budget, and sit down with the spouse and see if you can come up with a way to save 2.5% more, so that you are spending 87.5% and saving 12.5%. Basically that means for every $1000 on your monthly paycheck, you have to find a way to save an additional $25 per month– that doesn't sound too hard offhand, but obviously it depends on your needs and income. Maintain this level of spending/saving (87.5/12.5) for a year. After a year, have the same meeting again, so that now you'll be at 85% and 15%.
Some years this will be easy, because you'll get a raise of 2.5% or more (or similar increase in income) so long as you save the raise, rather than spend it, you won't even have to look for places to cut costs. When your income goes up more than 2.5% you can dedicate the surplus to additional savings, or even allow the surplus to be spent (this will help the spouse and kids feel that your goals aren't long term deprivation, but rather reaching a long term financial goal).
If you go through the 2.5% reduction in spending process 8 times, you'll find that you're now spending 70% of your paycheck, and saving 30%. So, why would you do this? Will it actually help? The answer is yes it will help, and it will help significantly. Compared to saving 10%, saving 30% will allow you to retire earlier, probably at least 15 YEARS earlier (this depends on how much you earn on your investments though).
This is a great way to hedge against poor investment performance. Futhermore this strategy isn't dependent on how much money you're putting into a 401k, 403b, or other "pre-tax" type account– just make sure that you actually save 30% of your paycheck.
20smoney | 16-Nov-09 at 9:30 pm | Permalink
Moe, That is an excellent strategy.
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Len Penzo | 05-Dec-09 at 2:13 am | Permalink
I enjoyed your article, but I think you are misapplying cause and effect viz., the reason for the low savings rate of Americans. I argue that the reason we have historically under-saved for the past 3 decades or so is precisely *because* of unemployment benefits and social security.
When they're not costing us in the form of higher taxes, entitlements tend to make people dependent and very complacent.
Ironically, if we weren't giving such a huge portion of our paychecks to the government to pay for Social Security, Big Gov't, and other entitlements most people would have more money to build their own nest eggs – and actually have a realistic shot at over-saving.
All the best!
Len
Len Penzo dot Com
Renee | 09-Dec-09 at 6:03 pm | Permalink
Im 20 years old, and Partnered with Market America. This business is absolutely Amazing. We focus on one-to-one marketing, and mass customization and we are HUGE on the internet (at least 3 times bigger than Amazon). We sell high-end products for low prices by cutting out the middle-man. We are a product brokerage, and therefore do not manufacture anything, we choose which companies we want to work with and choose the best of the best out there to produce our product. The other half is partnering with stores (Target, Barnes and Noble, Saks Fifth Avenue, Home Depot, the list goes on and on!!). We also just released our MA cashback program where you get 2% cash back on any order that you make, plus more if you refer people to our site. BUT ANYWAYSSSssss…….
I knew that in the current economic state, I would need to do something. By working part time, on my own hours, I am able to build my own residual income while I'm also a full-time college student. The job market out there is slim, and many college grads are having to pick whatever job they can find whether or not its what the have a degree in. When I graduate, not only will I already be making my own source of income, I will be able to pick and choose WHERE I want to work and WHAT I will want to be doing because the absolute imperative of me having a job won't be completely necessary. When I do choose my job, and have 2 incomes coming in, purely for myself, one of them will completely go to savings, while the other will be to budget out and pay what needs to be paid.