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How to retire without a huge pension and enjoy it.
by Jan R. Cooke
It got me thinking after I had been to one of the “Retire Wealthy” meetings, and had listened to speaker after speaker telling us we had to have X-hundreds of thousands of dollars in Savings, Investments and Retirement plans.
The ”experts” tell us that if you are currently earning $50,000.00 a year then you need to have something like half a million dollars in investments and retirement funds so that you can maintain your life style (some experts suggest as much as $1.3 million when future inflation is taken into consideration). The benchmark they use is that your investments have to generate at least 80% of your pre-retirement income.
As I was listening to all this I was thinking to myself:
#1 That isn't going to happen, because at age 53 I don't have enough working years left, and even if I contributed every penny I made, I would still fall short, and what would we live on in the mean time?
#2 There has to be a lot of people that have never worked for a company or business that has a pension plan or, for whatever reason, have no retirement savings (75 million Americans work for companies with no retirement plan. 50% of American adults over 50 years of age do not have any retirement savings, with only 33% actively planning their retirement. An astonishing 25% of all Americans have ZERO savings of any kind).
#3 There has to be a Plan B or C, or D, or something, that is actually workable.
The first thing I had to do was to see where their logic broke down. It's right there - “maintain your lifestyle” - that is where it all comes apart.
I don't want that lifestyle.
What I want is my place in the country where I can strive to live in a sustainable manner and move toward being as self-sufficient as possible. To have as few as possible living expenses and no debt. NO Mortgage, NO Car Payment, NO Credit Card bills or Credit Card debt, and not having to work unless I want to or if it is too cold in the winter to do anything else so might as well earn a few extra bucks.
So, I sat down and started working out the numbers and putting together examples to show that, NO, you do not need a half million dollars, not even a quarter of a million, not even a hundred thousand bucks. I set out to prove to myself and my wife, that if we kept doing the things we were doing, with some effort we could, over the next few years, rid ourselves of all debt, mortgage, power and natural gas bills, as well as a large part of the grocery bill. That I could, in fact, retire comfortably with only a small pension and without having to be a greeter at Wal-mart until I am 90.
So, now the question is, “What steps do we have to take to get to that point, and how is it all going to play out as we plan our retirement?”
What I discovered is really very simple. For every $100 you cut your retirement monthly cost of living, that is $15,000 less (yes, fifteen thousand dollars less!) you have to have in your retirement savings plan. I think this is significant enough to be repeated - For every $100 you cut your retirement monthly cost of living, that is $15,000 less you have to have in your retirement savings plan!
The math is this: if your investments earn 8% annually then $15,000 will generate $1200 a year, or $100 a month. So if you don't have to have that $100 a month then you save yourself having to put away that $15,000.
Now, for me, this was revolutionary. I could now stop looking at how much I had to save, and could look at ways to reduce my cost of living. Some things are easy. Buy a used car instead of a new one, so you don't have a car payment. Get your home paid off so you no longer have monthly mortgage payments. Lower your utility cost.
Let's see how that works in real life.
Car... well, a new $25,000 car, even with zero percent interest, will cost $416 a month (we won't even count the extra cost of insurance on new cars). Our great running 1992 Dodge mini-van was purchased 18 months ago for $3,000 cash. We have saved a lot by not making payments and on the reduced insurance cost.
The house mortgage or rent... with average housing prices going up and up, housing is a major expense. If mortgage interest rates go up only 2%, for a lot of people that alone would be an increase of $200 - 400 a month. Before we moved to the acreage, we rented in town for $730 a month, but now are in a position to have our housing cost reduced to zero before we retire.
What else can be reduced beyond these major expenses? Now that we are out on the acreage / homestead we rarely watch TV, so no more cable or satellite TV bill... that saves between 70 and 100 bucks a month (still have broadcast TV, get the news and “Hockey Night in Canada”, so all is well, plus the library has free DVDs and more books than I will ever be able to read). We can only get dial-up internet on the acreage ($19 a month) vs. high speed when we were in the city ($45 month)... that is another $25. Don't need the gym membership anymore as I have acres of grass to mow, and can do so much more outside in order to get my exercise... that is another $50.
Now, quickly add up the total... hmmmm, that is... WOW! $1,129.
Now, do the math stuff. But wait... I am getting some solar panels and a wind generator, also adding a wood heater, to cut down my utility bills. So I will be cutting my utility bill to almost nothing. Say a savings of $150 a month. Now the total is $1,441 and the amount needed in retirement savings for that? The math is $1,441 times 12 months = $17,280 and with an 8% return on investment you would need a whopping $216,000 in your retirement savings plan just to pay those expenses.
Now, to my mind, its much, much better to invest in myself and reduce my cost of living anyway I can. Get the land and home paid off as fast as possible (save a ton of interest too). Pay off credit cards and quit using them (except for emergencies). Conserve energy by using compact fluorescent lights inside and out, as well as timers and motion detectors for exterior lights; power bars to totally turn off TV, VCR, DVD and microwave when not in use; install better windows and improve the insulation in your house. Learn what you need to do to start generating your own power, then start to design and build a power system for your home that will use solar panels and wind generators. Add wood heat or a grain burning stove to your home.
Even if it was to cost me $25,000 over the next 7 years ($300 a month) to get everything I would need to be self-sufficient, the savings now and the reduced cost of living when I retire, would save huge amounts compared to trying to build a retirement savings program that would cost me $2,300 or more, a month to save the amount they think you need.
What else is there? Well, the property tax on the homestead is about 1/3 what my son is paying in town - that is another $1,000 a year or $83 a month. Lower cost of groceries as we will be raising some of our food, plus we will be eating out less (home cooked meals are cheaper then restaurants, and better)... say another $100 a month (still enjoy the odd dinner out). Clothing cost... jeans, boots, and sweatshirt are cheaper than suit and tie. I bought all the size 40x32 jeans, blue and black, when Wal-mart had them on sale for $9.00 a pair. Won't need to buy jeans for several years - well, unless I gain a bunch of weight.
Now, like everything else, there is a catch to this. You have to put the money up front to buy all the necessary equipment. The biggest problem we had was trying to find those first handfuls of bucks to start being able to reduce. So we had to make up our mind that we were going to bite the bullet and find ways to get those extra dollars to get started.
We looked around to see what we could do and we found lots of things. From not eating out - $20 a time; going to movies - can't do that for less then $30; coffee at Tim Horton's or StarBucks at $3 a cup... that is $60 a month. I bought a lease-back laptop computer (writing this on it) for about half the cost of a new one. For holidays, camping in a tent (bought on sale, of course) instead of staying in a hotel, going to a local lake instead of flying somewhere. Stay with the regular lawn mower rather then buying a new riding lawn mower (that is $1,900 or payments of $60 a month saved). We always look for bargains, at yard sales, clearance sales and thrift stores (one time, it was everything I could put in a box for $5.00, got 4 like-new light fixtures, a couple of shirts, a back pack, a bunch of yarn for the wife, and 3 good books).
When we found ways to save, we used that money to start conserving energy. By replacing all the light bulbs in our house, together with the timers and motion detectors, has resulted in an immediate $25 month savings on our power bill ($25 X 12 months = $300 a year ). We purchased our first solar panels last week. The 2 deep-cycle batteries and an inverter we had acquired several months ago. We are starting to supply self-generated power to one room at a time as we build our system. Those savings then get put toward the next step. We will be ordering and installing a wind generator this spring. Each month the aim is to add something to our system. Another solar panel, another battery, buy a chain saw, install a wood heater.
We are focused on doing things that will reduce our ongoing cost of living (saving now) and reduce our retirement cost of living (saving even more later). I smile every time I turn on a light knowing that I am giving the power company less and less of my money. The more we invest in ourselves and the more we save, the more we are able to invest. With each dollar that your cost of living is reduced, the easier it is to reduce further.
We will be able to make it very comfortably on the amount paid by Canada Pension (in the USA, Social Security states that the average retirement benefit is $11,000 per year) and the small sum I will be getting from a modest private pension. We will even have money left over to treat the grandkids to ice cream now and then. We will be able to replace or repair things that need it. Might even manage a holiday in the winter every few years. Plus every time there is a cost of living adjustment it will be like getting a nice raise.
It is amazing how far your money will go when you do not have to pay Mortgage or Rent payments, Car payments, and Utility bills.
Mostly we will be able to enjoy ourselves sitting in our front yard watching the grandkids play and the garden grow. Taking walks down the lane. Enjoying the lack of noise. Let me tell you I do not miss boom-boxes, car alarms, squealing brakes, graffiti, rush hour traffic. Nope! Do not miss them at all.
Now, don't take my word for it, and don't follow blindly the “experts” that tell you that you have to have a half million or at least a quarter of a million dollars invested before you can retire. Sit down and work it out with your numbers. Do the math over and over until you know where you can save and what you can get by on. Figure it out for yourself if it makes sense to move to the country, to find ways to reduce your cost of living, to generate your own power, to grow your own food... if it is the right thing for you to start to be self-sufficient.
The numbers and the plan works for me and my wife. We will be spending the next 7 years investing in ourselves and our dream.
Statistical data compiled from the following sources:
- investopedia.com - a Forbes media company
- Council of Economic Advisors as reported in the Wall Street Journal
- forbes.com - National Retirement Planning Coalition