The Fast Track to Retirement: Reduce Consumerism

The quickest way to grow a nest egg is to cut expenses as much as possible.

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By Joe Udo

It's almost Thanksgiving and retailers are going all out on advertising this year. Plus, 2013 has a shortened shopping season because Thanksgiving is later than usual. As a result, retailers are opening even earlier on Thursday. For example, Kmart will open at 6 a.m. on Thanksgiving and will stay open for 41 hours for Black Friday. That's partly our fault because every year more Americans go shopping on Thanksgiving Day. The consumerist lifestyle may help the economy, but it won't help your retirement.

It's hard for young people to think about retirement because it's such a long way off. Getting a new 50-inch LCD TV takes just a few minutes with a swipe of the credit card. Black Friday makes it even more fun because everyone is out trying to score a good deal. It's easy to get caught up in the consumerist lifestyle and ignore the chore of saving for retirement. It's much harder to take the long view and see why spending less money is better in the long run. Here's why it's better to save that $500 instead of getting a new TV:

Less consumerism means you will need less money for retirement. Financial experts recommend replacing 70 to 80 percent of your income before you retire, which means the average household needs this proportion of their current income for retirement. This income can be from investments, pensions, Social Security or even a part-time job. As you can imagine, it's very difficult for most people to generate 70 to 80 percent of their current income without a job. That's why many people have to wait for Social Security benefits or a pension to kick in before they can retire.

Most people will need to spend 70 to 80 percent of their current income to get by in retirement. You don't have to be average, though. If you spend less and save more, then you will be used to it and probably won't need to spend a lot of money after retirement.
What if you only spend 50 percent of your current income? Then you would only really need to replace half of your current income in retirement. It is much easier to achieve 50 percent replacement income than 80 percent.

Less consumerism means you can save and invest more. Another rule of thumb is to save 10 percent of your income for retirement. Saving 10 percent every year will most likely enable you to retire at 65 and generate the previously mentioned 70 to 80 percent replacement income. Many families spend all their income and even saving 10 percent is difficult. However, if you can manage to spend only 50 percent of your take home income, then you will be able to save a lot more than most people.

Saving and investing 50 percent of your take home income will put you on the fast track to financial independence. In 20 years, your investment income will likely be more than your earned income, and that's what being wealthy is all about.

Picture $500 compounded over 20 years. What if you saved and invested $500 instead of spending it on a new TV? After 20 years, you'll have $2,330 (assuming 8 percent annual gains). That's not bad, but not a life-changing amount either. However, once you start saving, it can become a habit. If you save and invest $500 every year, then you'll have $24,711 after 20 years. Now that's a more significant sum.

Saving 50 percent of income isn't possible for everyone. Saving and investing $500 per year will compound to almost $25,000 in 20 years. Imagine how much you'll have if you save 50 percent of your income. It will most likely be enough for you to achieve financial independence and do whatever you want. Of course, saving 50 percent isn't possible for everyone, but I think most of us can save much more than we are currently doing now. Let's examine our consumerist lifestyle and see if it's possible to cut back a bit and take the long view instead.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.

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Good tips. I like the save, "don't buy a new TV" example. The advice in this article is solid.

Apart from it, I think insurance is the biggest money waster.
If you are paying more than $40/month on your auto insurance, THAT is an issue.
I'm usually able to find it for around $25/month (thanks Insurance Panda... although 4AutoInsuranceQuote is also good).
My '11 Accord that I drive right now is dirt cheap to insure, requires no maintenance/repairs, costs nothing to fill up (thanks GasBuddy App), and is a beautiful car that is fun to drive.

March 17 2014 at 5:48 PM Report abuse rate up rate down Reply

Excellent advice in this article. And very encouraging to see that.

A couple more suggestions. Most people operate on the idea of: "I will pay my bills first and then save whatever is left over." Unfortunately, with the ingrained idea of constant consumer shopping, there is never anything "left over" after the impulse shopping purchases. So, pay yourself FIRST. Set an amount for savings of at least 10% of your income and "spend" that on investments FIRST every month. THEN, pay bills with what is "left over". (15% would be even better. And 20%, better yet.)

If the idea of even saving 10% seems completely impossible, then start with saving 1% of your monthly income. Add another 1% to that amount every month thereafter for a year. That will get you up to 12% savings in 12 small manageable steps. Then continue saving 12% a month.

But, whatever you choose to do..........DO SOMETHING. Don't be one of those people who tell themselves: "I don't have the time or money to bother with saving or investing right now. Plenty of time for that, later." The years will fly by........until, suddenly, you are 60 years old and realize that you have NOTHING saved for retirement. (This is reality for at least half of the 60-year-old's in America.)

November 23 2013 at 1:00 PM Report abuse rate up rate down Reply

Eliminating debt is the secret to success, and to an early retirement. If you don't owe anybody, that's like money in the bank. It's a real no brainer.

November 22 2013 at 11:19 AM Report abuse +3 rate up rate down Reply

Just be flexible, illnesses and other emergencies come along and hit your nest egg....this is written from experience.

November 22 2013 at 10:12 AM Report abuse rate up rate down Reply

I\'m a firm believer in saving for retirement. I\'m currently puting 30% in my TSP account. You know, 20 years ago, I was puting that 10% and I can tell you 10% just doesn\'t cut the mustard! It would take a steady, and predictable return of 8% to 10%, over 40 years, to make a contrabution of 10% pay off for your retirement, and really, where can you get that? I\'ve been in the market, at times, and have avoided BOTH crashes, and can tell you I\'ld rather make smaller returns than risk losing half my hard earned money in one week! Most Americans will not save as much as me, if at all, so the notion of having a leasure retirement, for the average person, is just a dream.

November 22 2013 at 9:32 AM Report abuse +1 rate up rate down Reply

Live below your means and save it.

November 22 2013 at 9:13 AM Report abuse +5 rate up rate down Reply

I just read several great posts on this topic including ones on downsizing, frugal living, retiring overseas and more on the retirement site Retirement And Good Living. that site offers information retirement topics and has a blog of posts by guests from around the globe on retirement issues.

November 22 2013 at 6:46 AM Report abuse +3 rate up rate down Reply