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Your Spending Reflects Your Lifestyle, Not Your Income

by J. Money on Monday, June 6, 2011

retirement cake - guy in hammock
Do any of you read Entrepreneur Mag? If not, and you like that kinda stuff, it’s definitely worth picking up (same with Inc.). Most of the articles are about growing your own biz or learning how to start one, etc, but my favorite section out of each issue is slowly becoming the one called “Your Money”  (Surprise surprise!  Haha…).  It’s not like I don’t get enough from all the other magazines or blogs I follow every day, BUT there’s something about this one that always sticks to me and inspires me days later.  And you know what’s cool about it?  It’s written by another personal fiance blogger we all know!!  J.D. Roth from Get Rich Slowly – making it even more interesting ;)

Anyways though, in a recent column he did for June’s issue, he was talking about how most of the gurus out there base their retirement recommendations on X percent of your current income – usually around 70-80%. So if you’re making $100K these days, and you wanted to retire tomorrow – you’d need  to have, say, $70k/year to maintain your current lifestyle. Which probably sounds familiar as that’s what I’ve heard all my life too, pretty much, but J.D. switches it up and says these calculations are missing a pretty important piece — your SPENDING habits! That’s what determines your lifestyle down the road, not your income. He also says “basing your retirement goals on your income might lead you to save too much, meaning you could have used that money to enjoy life when you were younger.” Not something you hear much out of a finance guy ;)

Obviously saving up “too much” money would be a great problem to have, but I agree that focusing on what you spend your money on, and understanding the costs of your lifestyle as it goes on, is a much more realistic way to determine how much you’ll need later when it’s time for “retirement.” (I put those in quotes cuz I doubt there will EVER be a time I want to stop and do nothing! ;)  But the good thing about money is that it gives ups the option to change our minds whenever we want!)

Two people making $X amount every year will have completely different outcomes as to where that money will go in the end, so you need those expenses factored in to better put things in perspective. We all know people making 3 or 4, or even 10 times the amounts we make but are STILL barely scraping by and making ends meet! 70% of their income might not even be enough for them down the road, whereas others who are more frugal (*ahem*) could realistically live off 40%. Your income is still important, but it’s just one piece of the entire retirement puzzle.

If you’re interested in the different ways to calculate this kinda stuff, check out some of the tools J.D. recommends for tightening up the game plan. I’m gonna join you and play around with a couple of them too :) (Cuz we’re big nerds like that!)

  • T-Row Price calculator – It bases the results on exactly what we’re talking about here: spending over income.
  • The Motley Fool — There are two good calculators there – one that estimates your retirement expenses, and the other which gives you an idea if you’re saving enough.
  • FireCalc.com – which he says is pretty overwhelming at first, but it’ll give you an idea of how safe (or risky) your retirement plan is based on how it would have fared in every market condition since 1871 (Cool!!).

Only time will tell how much we’ll TRULY need 30-40 (to 60?) years from now, but by putting plans into motion now and staying on top of it, we’ll be a LOT better off when the big day comes! And if you can get there with NO mortgages or loans too, you’ll be sittin’ even prettier…  hopefully next to your friend J. Money ;)

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(Photo by cogdogblog)


{ 22 comments… read them below or add one }

1 cashflowmantra June 6, 2011 at 8:21 am

This is a great way of looking at things. It is always depressing to look at the numbers to see what is needed for retirement with everyone needing well over $1 million dollars. It also becomes difficult to quantify exactly what that money means when trying to estimate inflation and the value of a dollar 30-50 years into the future. That doesn’t mean it isn’t important to save and plan but taking the perspective that people will be adaptable offers some solace.

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2 solnus June 6, 2011 at 12:21 pm

I stopped reading once I hit this: “you’re SPENDING habits!”

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3 J. Money June 6, 2011 at 12:25 pm

Haha… oops. That’s why I’m a blogger and not a journalist!

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4 JennyDee June 6, 2011 at 12:46 pm

Once I started on the pf journey, I balked at the numbers some of the calculators were telling me I “needed” to retire on. When I retire, I will have the house and car and student loans paid off, so that’s almost $900 a month I’ll be able to save/play with. I also intend to play a bit now, because what’s the point of having a bunch of $$ when you retire, only to discover you’re too sick to do anything with it? I want to walk the Inca Trail (5 miles of rugged terrain) and I don’t know that my body will be able to handle that when I’m in my 50s. I plan to do that within the next 10 years :)

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5 Jenna June 6, 2011 at 2:08 pm

So true! I’ve always thought it was odd to base it off income. For those of us in our younger years, our current income is (hopefully) considerably lower than what it’ll be just before we retire. But, I’d hope that my spending doesn’t follow the same trend! Plus, as @JennyDee says, if you have all of your debts paid off, that could be a significant chunk of money you won’t have to be spending. And thanks for sharing the tools – as I start to pay off my student loans, I’ll be focusing more money on retirement, so I really need to get my bearings on what I need to be saving!

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6 Evan June 6, 2011 at 2:49 pm

Such a good and over looked point – I was just working on a client today who is looking to double their spending once retired because they want to travel more

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7 JMK June 6, 2011 at 2:53 pm

We cover the basics now with about 55% of our income and the rest goes mostly to whacking down the mortgage, building up our retirement accounts, and a trip every other year with the family. Why on earth would I need 70% of our current income in retirement when we have no mortgage payments, no retirement savings to contribute to, no kids educations to fund, no work related expenses, no groceries for a teenaged boy, one car rather than two etc etc. What will go up is the travel budget and fees for activities, hobbies and courses but certainly not enough to compensate for all the costs that will have disappeared by then.

According to most calculators I need a few million to retire because they assume we’ll need ~70% of our current income. I gave up using those years ago and instead calculated what our monthly costs in today’s dollars would be without the expenses listed above. Just the basics. Then I factored in a small pension, and our governement benefits (yes, a realistic assumption in Canada) and figured out how much was left that has to be covered by our investments. Turns out that without inflation we only need $400k, so I’m assuming $500k to be safe. Everything we accumulate above that is our retirement travel and fun stuff budget.

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8 Jen June 6, 2011 at 3:24 pm

Icky, evil inflation! Ugh, I did all the calculators and it’s so depressing since we don’t have much saved yet. I’m really gonna have to step up my game or we’ll be living in box and eating bugs for retirement. Great post though, it kinda gives me hope that we can find ways to reduce the amount we’ll need to retire. Must save more money….

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9 Matt Wegner @ Financial Excellence June 6, 2011 at 6:36 pm

I agree with the thought process here but I would caution everyone not to forget about the cost of medical care in the future. It’s not that I think the cost of care will keep rising. Well, actually I do, but I think we often overlook the fact that we’re getting older so our need for medical care will rise exponentially as we get older.

I want to leave an inheritance to my family so I don’t want my net worth chewed up by healthcare costs. I just don’t envision my cost of living going down when I “retire”. I’m planning for my expenses to go up so I’m saving as much as I can now, while leaving a little room for fun as I go.

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10 J. Money June 6, 2011 at 9:08 pm

@cashflowmantra – Amen, brotha.
@JennyDee – YES! That’s my plan too – to have all major loans/expenses outta the way so I can spend on what’s important at the time :) Unfortunately medical and old-person stuff will ofcourse take its place to a degree, but if we keep on trucking and knocking down that debt now we’ll be in a lot better shape dozens of years from now… and we have some fun in the meantime.
@Jenna – Great! They’re def. good calculators – even to just check in on every now and then. I like to run different ones too for the fun of it. (Nerd alert, nerd alert!)
@Evan – See that. Maybe that’s just doubling his expenses from 10% to 20% ;)
@JMK – At least you’ve done your research! :) I guess it’s better that the calculators tell people to save MORE than less though just in case… although I do wonder if seeing a blinking “You need 10 million to retire!” just overwhelms them and they give up before they even try. On the other hand maybe it lights a fire under them???? Too many “what ifs!” haha…
@Jen – Well it’s good you’re on it now! :) Better to start early and save-save-save so you have the options to do whatever you want down the road (and hopefully sooner too, if you strike a nice balance). You can do it, Jen!
@Matt Wegner @ Financial Excellence – Yup, excellent point my friend. We’re gonna have a lot more medical expenses down the road whether we like it or not. Not sure what that looks like because we haven’t experienced it yet, but I agree saving more than less is important to keep in mind. Thx for stopping by Matt :)

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11 MariaN June 7, 2011 at 4:38 am

Good morning, peeps. Several quick points, really.

1) Agree with J.D. Roth that over-saving can rob people of experiences that they better have now, or even of simple joy.
2) Good point about spending habits as well. In other words, it is not about enjoying life so much as how do we enjoy life.
3) This brings me to the imperative to revisit our ‘wants’ and make sure that maximum effect is achieved with minimum spending.
4) Pension arrangements are rather different in the UK – in fact most of us have a problem understanding what the fuss is about on the other side of the Atlantic.
5) It is true that medical bills are to incease with age; it is also true that other bills (raising children, going to night clubs etc.) decrease. Life has its own way to keep things in balance. As I put it, the older I get the more money goes on glasses, teeth and hair colour.

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12 Financial Independence June 7, 2011 at 12:06 pm

I agree, that the only way to achieve financial independence earning a living is to humble your spending and put a side a substantial part of it.

There is no miracles – you want to retire early, you have to save more than 10% of your paycheck. It is not glamorous but it can be done.

However it depends what you want – see the world and enjoy your live while you young, or have sanity of mind when you are in your 40+, 50+… :-)

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13 Financial Success for Young Adutls June 7, 2011 at 1:35 pm

So true. I’m am constantly going back and forth about whether I should save more now, or enjoy life while I’m young and healthy enough to do so. I’m working on a happy balance and I am determined to keep living on my current income levels even when I get a raise.

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14 No Debt MBA June 7, 2011 at 3:59 pm

I also like the Flexible Retirement Planner as a tool. http://www.flexibleretirementplanner.com/java/LaunchFRPWeb.html It’s closer to FIRE Calc, but runs on a monte carlo simulation instead of historic market returns. It’s an important distinction if you want to plan for longer periods since the longer the time period you run FIRE calc with the fewer runs it will be able to do. Whereas the monte carlo does not have a comparable limitation.

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15 retirebyforty June 7, 2011 at 4:14 pm

It’s tough to figure out how much you’ll spend when you get older with healthcare cost raising. Those calculators are pretty neat. I like the FireCalc a lot too, cool graphs. ;)

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16 Ginger June 8, 2011 at 11:33 am

The average amount banded around for the boomers is $250,000 for medical expenses. I took that and indexed to inflation + a few percent more (because health care keeps going up). I also looked at COBRA so my EF and my amount I need to be making “passively” for financial idependence includes the cost of COBRA which for my DH and I is $550/month. So I just count what we spend plus that and I think I will be ok for the future.

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17 20 and Engaged June 9, 2011 at 4:08 pm

My spending fluctuates every month, so is my lifestyle inconsistent? hehe. Honestly when I get to a steady income again, I’ll have a better idea of my lifestyle, but looking back, we were pretty modest. Paying bills, saving money, opportunities to splurge.

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18 J. Money June 12, 2011 at 3:30 pm

@MariaN – “the older I get the more money goes on glasses, teeth and hair colour.” haha… for me, it’s clothes & travel expenses ;)
@Financial Independence – Right. 10% sure ain’t gonna cut it unless you’re making BANK right now…. and for the next 30 years ;)
@Financial Success for Young Adutls – Oh yeah, the balance can def. be tricky, esp. as things change over the years. I try to ask myself if I’m happy before going to bed every night, and when it’s a “yes” I know things are going well :) If not, I try and find out why and see what I can do about it… money-related, or not.
@No Debt MBA – Interesting. I’ll have to test that one out too, thanks man.
@retirebyforty – Pretty pictures keep our attention better, haha…
@Ginger – That’s a nice way of doing it! Scary as hell (re: medical costs) but def. smart :)
@20 and Engaged – You’ll be back on track soon enough, I know it :) You’ve got too much spunk not to starting bringing in that steady income again!

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19 Jaime June 24, 2011 at 12:15 am

I didn’t know J.D. wrote for that magazine. I’ll check it out. I haven’t been reading my PF blogs lately. But I’ve long disagreed with the 80% of income that financial advisers tout. I, too agree that it depends on your lifestyle.

Financial advisers whether at a bank, credit union or financial company like Fidelity are all there to make money and while their advise is on the money a lot of times. Other times it’s seriously unrealistic.

It’s almost like they assume that once we hit our golden years that all of us are going to be shopping every day, eating out every day, golfing every day, hitting up the salon every day and going on constant trips. They act like we’re going to go on some eternal vacation and while I do look forward to one day quitting the workplace, I know that it’s not going to be a vacation.

Retirement advisers seem to think that the CEO, the accountant, the janitor, and the receptionist need to be on the same retirement plan regardless of lifestyle, income, and location. If you live in NYC you might need more than if you live in the mid-west.

I’m a female in my twenties, but shopping is pretty boring for me. I usually only go when I need to. My hobbies tend to include reading, writing, movies, drawing, graphic design, etc. Most of those are pretty affordable but if my hobbies were say sailing, or collecting then I would need more for retirement.

My bf and I like eating out but not every single day and after awhile eating out every day can get boring so we alternate by cooking at home. I really wish retirement advisers would quit treating everyone the same way and customise retirement plans more. Anyway thanks for posting that. :)

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20 J. Money June 24, 2011 at 9:39 am

Amen sister! Say it loud, and say it proud! Haha… cool you’re into graphic design too – that’s hot. I actually went to school for it but failed to make it into my career ;) Though I do get to doodle here and there on the site – woohoo!

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21 Vic October 14, 2011 at 11:25 pm

I really agree. That is why if we need to change our spending pattern and make it more righteous, we make it change our lifestyle. Changing our lifestyle does not only saves our money, but also our life as a whole.

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22 J. Money October 15, 2011 at 11:54 am

Yep! It affects your whole outlook :)

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