Photo Credit: Analytical Thoughts

It’s not how much you save, but how much you spend that truly makes a difference – especially when it comes to your retirement.

Many people struggle day to day on payments, even though they make comfortable salaries. Unfortunately, many people have strong consumer habits, and then they are burdened with “unexpected” expenses, such as healthcare, or even the spike in gas or food costs. There are plenty of people who make six figures, yet have nothing in their savings account to show for their work.  Remember, the American savings rate is less than 0; in fact, it current rests at -.5%. We like to spend far more than we ever make; this is what is so dangerous to people now, and extremely dangerous in retirement.  Regardless of how much you save or make, your spending habits dictate how stable you are financially.

The 70% fallacy of retirement

Many retirement planners tell you to plan to spend 70% of your current pre-retirement income while in retirement. While this may sound appealing, where does that extra 30% in cuts come from? Certainly, you might not feel like splurging on cosmetics and coffee, but there needs to be something more substantial to warrant such a large 30% cut. Thus, lowering your standard of living now will help you maintain a constant and better standard of living when you are in retirement. Very few people save too much; many are saving far too little to be able to retire.

Paying for the house

Being able to afford your own home should be the first goal of retirement. The monthly mortgage payment is enough to sway the amount you spend back down to the 70% level. Just by eliminating this payment, you’ve greatly decreased the cost of living, yet gained the financial freedom of having the house in your own name. The problem is that most mortgages are around 30 years, and it takes many that long just to have the home paid off, especially if they didn’t take advantage of super low HELOC rates the past 5 years.

Solution: Refinancing to a 15 year loan is a great way to lower the amount of time to complete home ownership, while making sure that you cut out the mortgage in half the time. The benefit is that your monthly payments hardly skyrocket; just pay a few hundred dollars per year and the house is in your name fifteen years quicker than before.

Spend less on depreciating assets

Cars and boats look great and make you feel luxurious, but these toys can be costly in the long run. Paying for a new car, both in maintenance and auto loans, adds up quickly. The biggest cost is by far depreciation of asset;, a new car today worth $40,000 will only be worth $7,000 to $8,000 in just a few short years.

Solution: Driving used cars will allow someone else to pay the depreciation for you. Cars depreciate the most in just the first 2-3 years before they continue with a much slower depreciation curve. If you can refrain from buying  that brand new car now, you can have it in two years for half the price. Indeed, it has a few extra thousand miles and possibly some minor blemishes, but you can be sure it still has the new car smell – at a much lower price.