Archive for Sunday, March 18, 2007

Cost cutting can ease your way to retirement

March 18, 2007


At our house, we drive old cars and do most home improvements ourselves. We don't do nights on the town. We go to nice places on vacations, but avoid the fancy hotels.

With the big cost-savers out of the way, it was time, a few weeks ago, to trim some of the smaller expenses.

Why, I wondered, is the electric bill more than $200 a month? Were we using too much hot water?

So Dash, my 12-year-old, and I got a big measuring cup and attacked the problem scientifically. The showerhead in the master bath was gushing two liters every eight seconds.

We installed a valve and cut the flow by two-thirds. Then we put a kitchen timer by the shower and agreed on a five-minute limit.

Next, we turned to the kitchen, lit by a dozen 100-watt floodlights. The solution was obvious: Turn them off when you leave the room.

A change in lifestyle can have a big effect on expenses - bigger than we realize. And this shows how difficult it is to plan for retirement.

Lots of planners assume retirement expenses will be 75 percent to 85 percent of preretirement costs. But the 75 percent-85 percent rule of thumb could be pretty far off. And that could have a dramatic effect on your investing strategy.

Imagine you are overstating your future retirement costs by $5,000 a year. To create that much income for retirement, you'd need about $125,000 in your nest egg. That assumes you would withdraw about 4 percent of your nest egg each year in retirement.

What would it take to accumulate that $125,000? Assuming an 8 percent annual investment return, you'd have to put aside about $8,600 a year if you have 10 years to retirement, or $2,700 a year if you have 20 years.

Now imagine you've underestimated your retirement costs by $10,000 a year, or $20,000. For many of us, it would be impossible to save enough to generate that much additional income.

I'm not suggesting retirement will be cheap. It's just that a small error in estimating those costs can have big ramifications.

Which gets us back to the two-part benefit from trimming those minor costs.

First, if you can reduce your cost of living today, you probably would be able to do the same in retirement.

Second, if you cut costs today, you can invest more, making it easier to accumulate the amount you will need to retire. And a lot of the small savings are painless, such as shorter showers, turning off the lights : .

It's a small price to pay. It might even mean retiring a year or two sooner.


Use the comment form below to begin a discussion about this content.

Commenting has been disabled for this item.