Host Gator

Thursday, February 23, 2012

EVERY bill is a big deal

I mentioned yesterday how the savings rate drastically affects your retirement date, and today we're going to demonstrate just how much each little bill you have can delay your retirement.

Just to clarify, I am using the term 'early retirement' to describe the moment you have enough in investments to live off of the passive income created by those investments. Most people agree that you an safely withdraw 4-5% annually from your portfolio, so that would mean you would need 20 to 25 times your annual expenditure in investments to be able to 'retire'. So far so good.

So obviously the lower your annual expenditures are, the less you will have to have in your "stash" to be able to retire. But how much less? Most Americans think of their expenses in terms of monthly bills, so we'll use that.

Many people have a variety of things that they spend $50 or so dollars a month on each (haircuts, coffees, movies, subscriptions, whatever) and individually they don't seem like much. But in terms of how it affects your retirement date, these expenses are ALL a big deal. Check this out:

A single $50 monthly bill requires you to have an extra $12,000 in your stash to retire. And that's using a 5% withdrawal rate (at 4% its more like $15,000).

So that $50 cell phone bill? $12,000
That $50 cable bill? $12,000 more
$50 in haircuts? $12,000
$250 in food a month? $60,000

You can use this to find out just how much each of your bills will require you to save for retirement. When put that way, it is a lot easier to figure out why you should drop your food bill from $250 a month to $200, or lose the cable, or cut your own hair, etc.  I am constantly reminding myself of these facts to motivate me to save. Remember, even those little bills make a big difference!

-The Money Monk


  1. I've been doing this for a while. It really makes me concentrate on what's important and what's not. It's very easy to prioritize when you think about what expenses are worth working a year or more for.

    I actually use a 3% yield when coming up with the money needed to fund expenses, but I would agree with you that a 4% SWR is more accurate.

    Best wishes!

  2. Yeah DM, 3% is even safer, but then each $50 of monthly expense would require about $20,000 extra in the stash! Whew! Definitely impresses the need to cut spending as low as possible!

    Thanks for the comment.