I am old enough to recall the rather weak urging of our federal government as it warned us back in the 1980s that we, as citizens, weren’t saving enough money. The glaring contrast then? Japan, a nation flush with capital from its recent successes in industry (think autos here) was dominated by a populace that saved money, and lots of it. You may recall a lot of that capital was diverted to the U.S. and resulted in large purchases of U.S. corporations, real estate and so on.
Don’t, by the way, think even for a minute that the actual Washington D.C. operatives really wanted us to save: they have and always will prefer for Americans to spend all they have and borrow as much as possible on credit. They want us on a sort of a perpetual “keeping up with the neighbors” treadmill. Why? To promote demand for goods and services, to grow our economy the Keynesian way.
Do you need a point of proof? Of all the interest rates one pays on loans, nothing is ever lower than the rate one can secure for a home mortgage. And the reason is apparent: people buying homes consume more, much more. A new house often means a new car in the new garage, a new refrigerator in the new kitchen . . . well, you get the idea.
Oh well, the damage has been done, the national horror is now upon us with baby boomers (born between 1946 and 1964) surging into retirement, significantly underfunded. I saw a number published from the Bureau of Labor Statistics just a few weeks ago that said that those within 10 years of normal retirement age have median financial assets of less than $50,000. Let me suggest some fixes, some cures.
There isn’t a single magazine or newspaper in print today regularly including a financial section that won’t occasionally write about how to establish a family budget, how to save 10% a year, or how to calculate what one needs to achieve a retirement date within 10 years. We have all seen and read them. But, these are generally poor ways to find money to save for future purposes, largely retirement.
Filling out a budget list that may not look anything at all like yours, plugging numbers into categories you have no idea about, well, it leads to budgets that are never followed. I have two suggestions that I think are far superior to the traditional budgeting process. They take different forms: One involves the budget process itself; and, the other a way of acting on a budget in more extreme cases. They follow.
If you can’t name it, don’t fund it.
As a financial planner, I have sat down with countless prospective clients, yellow pad and a pen in my hands, and asked them how much their net household income is annually. Here, let me suggest a number for the sake of this article and use $72,000, so $6,000 a month, net to spend (or save) after income and payroll taxes. My very next question has always been: “Please run down your typical monthly expenses for me.” And, a list of all known expenses thusly unfolds from memory.
They might look something like this: Mortgage including taxes and insurance, $1500; two car payments, $550; health insurance, $500; average monthly utilities (gas, electric, water, etc.) $350 . . . and so it goes until the individual or couple I am working with throw up their hands and say that is all they can think of. The resulting total? It might be $4500 a month or a figure that is well below their after-tax income. A gap, in this case, of $1500 has been discovered. Spent? Yes, but identified? No.
So, the next thing I always say in the interview is: “So, wouldn’t you agree that saving a $1,000 a month from this $1,500 gap, putting it up high on your conscious list of important monthly expenditures, shouldn’t saving for retirement take a strong precedence over things you can’t even identify or put a name to?” Once, this priority is established, and saving actually begins, only then is it appropriate to start fine tuning a rigid budget.
Yes, some of this unidentifiable $1,500 will be found, but a budget with a much higher chance of being utilized is now forming itself . . . almost organically. This is a much better course of action for creating a budget. One is saying, in effect, to your monthly bills: “Identify yourself (monthly bills) or you simply aren’t important enough to stand in the way of my retirement!”
An odd dynamic often follows: As people begin building financial assets from their savings efforts, as they watch their balances grow, they are often drawn in to tighter budgeting by the joy of seeing a positive result. They water the tree, so to speak, and the water has only one source to be drawn from. This beats the heck out of the opposite dynamic: the despair that builds when one sees credit card balances expanding endlessly.
“Live like no one else for 3 years, live like no one else can for the rest of your life. “
This was how it was taught to me though I have seen a period of 5 or even 10 years also suggested for the time frame. But, it isn’t uncommon to find a couple now in their early 50s who have just put the last of two or three children through college, then finding themselves well underfunded for their looming retirement only a decade or so away, to turn things around in a positive manner very abruptly.
With a little luck, too, at around the time most of our children are fully fledged, we often find ourselves at that point in our lives where we are at our peak in earnings capacity. In the example above, all of the funding for kids and colleges evaporates and suddenly a lot of income and earning power can be aimed at retirement funding.
There is no great need to “live like no one else will,” but simply divert funds no longer used elsewhere toward retirement. This is a common example of how a lot of retirement funding can occur over a rather short period.
But, for others, let me suggest that the “3 years” of radical cuts is often very productive in extreme cases. It might entail selling your home and moving into a garage or efficiency apartment; it means driving a sound but old automobile and passing on expensive cars, it often means not eating out, and much more.
But, for the same income stated in my earlier example, $6,000 a month, it is very possible and I have seen it done, where someone has been successful dropping their expenses so dramatically that they are suddenly able to save $4,000 a month by living off of the remaining $2,000. That’s almost $50,000 a year in savings.
Three years of dramatic cuts, with any help from strong investment results in a strong stock market, might even approach a balance of something approaching a quarter million dollars. For five or ten years, the achievable retirement balances can be even more staggering.
So, these strategies, devising an organic budget and some form of a restricted lifestyle, would be two among a host of suggestions I might make, often do make. In most cases, let’s just find the money for savings, but let’s do it in the manner I have described: by finding out how much of our monthly budget gets frittered away for things we can’t even name or recall.
The money is already actually there. And, for those extreme cases, if you don’t shrink your lifestyle now, you will certainly have to do it later. I’d rather make these sacrifices in my 50s than my 70s, wouldn’t you?
And, is it really even a sacrifice? Not likely . . . most folks feel the financial pressures melt away as they move back to a small footprint lifestyle. For most of us, it just feels better.
One simply needs to look at a new trend in housing referred to as the “tiny home revolution” where people are throwing off the “government plan” of spending everything, living a big and stressful life in an oversized home, new cars every other year and endless dollars spent everywhere for everything.
That is no way to live and it certainly isn’t if you can’t carry it forward into your retirement years.
If you need a nudge, as a final reference to explore, and for your enjoyment, I might suggest you read and follow this blog: http://www.theminimalists.com/.
Your best life and best retirement may await you!
Corey N. Callaway
Investment Advisor Representative