Broker Check

Is your spending threatening your retirement?

| February 19, 2014

Cutting expenses is like eating healthier.  Most of us are in favor . . . in theory.  But it’s all those little decisions that can really add up!


In a previous post, I mentioned an author’s calculation that an extra 1.25% in annual fees could result in a $159,000 shortfall in a 401(k) account at age 65.


Similarly, I calculated the cost of a $3 per work day expense – let’s say coffee.  (Or for the non-coffee drinkers among us, consider a $15 per week pizza.)  How much will it cost you?  Using an inflation factor of only 2.5% -- and using an assumed ROR (rate of return) on the money invested (if you didn’t spend it) of just 5%, there would be an additional $146,000 at age 65 for someone who is currently 25.


Now I’ll put on my CFP® “hat” and get a little geeky with the numbers.  The internet and modern software are both potentially terrific things.  Using software and / or internet support, if you’re a technical or numbers-oriented person, you can certainly find or build your own model(s) helping you understand:

1.      How much you have to save.

2.      How much you have to earn on your investment

3.      For how long

4.      And, therefore, ultimately, how much you can afford to spend on living expenses.

To meet your retirement goals.


In my own personal experience, it is only a small minority of folks who actually do this type of technical work & analysis.


I know different people have different views on the format of your spending.  Here’s an oversimplified view.  If your bank / financial institution offers you a debit card and a credit card (For security reasons in a post “Target was hacked” world, I like using the credit card . . .) and if you can avoid or minimize your use of actual cash / ATM withdrawals, it is easy enough at the end of each month to go online and / or review your paper bank statement to determine how much you spent for various categories of expenses.


If you were to simply add up the numbers each month for 3 months – or even better – put them into a spreadsheet – or even a yellow pad – the results are likely to be illuminating – and potentially will motivate you to reduce your total expenses.


Anyone trying this experiment, call me or email me and let me know how it is going!

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