Living now versus saving for a great or early retirement

At one extreme you have spending nothing now and saving everything for retirement.  On the other end you have spending everything you make (and then some) and never saving a penny for retirement.

Somewhere in the middle is the “your” right answer.  So how do you draw the line?  The short answer is to find a number where you can live off of a 5% return and then you’re probably OK spending the rest (living now, if you will).  Financial advisers will disagree as to the proper percentage you can comfortably rely on.  5% is pretty conservative.  Most are between 4 and 8%.  Some are as high as 10%.  I like to be conservative when trying to balance living now and making sure I have enough for retirement.

I’m also pretty nuts when it comes to saving for retirement – too nuts for sure.  But I get great pleasure out of knowing that I’ll be able to retire well and/or young – that I’ll be financially “free,” so to speak – as long as the world doesn’t end later this year…  So I do get some “live now” enjoyment out of saving.  But not everyone is as nuts as me.

As a result, there is really no one-size-fits-all answer to where the line is.  The key is finding the right balance for you. 

Here’s one hint.  If you catch yourself saying any of the following phrases out loud, you probably are spending a bit too much:

• I could get hit by a bus tomorrow;
• You only live once;
• I can’t picture myself old;
• I have a feeling I’m going to die by 30 (or 40 or 50) so I don’t see any reason to save for retirement.

The fact of the matter is that chances are you’re going to be old someday.  So you’re going to need a lump of cash to live on when you’re old.  And you’re going to have to save that money starting yesterday to get there.  Living by the mantra “spend everything you have now because tomorrow is not guaranteed” is just irresponsible – don’t get me started into that…

OK.  For example, want to retire as if you were paid a $60,000 annual salary and think you can match what the Dow Jones Industrial Average returned over the last 20 years (or 9.4% reinvesting dividends)?  Then you’ll need to save about $650,000.  Want to invest more conservatively once you retire and expect only a 5% return then you’ll need $1.2 million to maintain that “salary” without eating into the principal.  Need to figure out how to get to easily get to $650,000 or even $1.2 million start here today!

Of course, this is an over simplistic analysis.  It does not factor inflation but does factor taxes in a very basic way.  Assuming your investments were all long-term ones subject to long-term capital gains rates, then taking out $60,000 would be taxed less than the hypothetical, which assumes you want to retire “as if you were paid a $60,000 annual salary.”  I like phrasing it this way because it’s how we’re used to thinking with our salaries and paychecks. 

So how does this relate to balancing living now versus saving for retirement?  Simple.  We’ll use the $1.2 million figure and assume 30 working years left.  If you have nothing now and assume the 9.4% the DJIA averaged over the last 20 years will continue over the next 30 years then you just have to save $7,500 per year or $625 per month and toss it into an ETF or mutual fund that tracks the DJIA, reinvesting the dividends.

You could literally spend every other penny you make and be confident that you’ll retire with a decent nest egg in a few decades.  So “live now” with the rest. 

This is how I stay balanced.  I max out my 401(k) every year and Roth IRAs for my wife and me every year.  I also auto-invest a little bit more in two separate accounts and then intentionally save a bit more.  Yeah, I know that’s a ton to do.  But I’m a bit crazy.  My goal is to be financially “free” before I’m 45 and retire before 60.  By my calculations, I’ll get there assuming I don’t get smacked with unemployment in the next five years.  Knowing that, I’m OK spending a few bucks now to enjoy my life with my family.

With all that “saving” I’m comfortable “living now” with the rest.  Sure I could live like a king now, taking two cruises to Hawaii a year instead of maxing out our Roths.  But that does nothing for me.

Another thing I like to do is list out our luxuries to remind myself that we do “live now” and have been incredibly blessed.  For example, we live in a doorman building, have a very nice 52-inch LCD, a 2009 Honda CR-V that we paid cash for two and a half years ago.  We went on a nice cruise last year and never worry about keeping the lights on or collectors calling. 

Our money worries are trivial.  We worry about when we’ll have enough for something, not if.  Worrying about when instead of if is a big deal.

So yeah… I’m cheap.  But we “live now” too, knowing that we have retirement on track.  How about you?  How do you strike balance between living now and worrying about retirement?  If you don’t have a way, try finding a number and setting up an auto-investing program to get you there.

Until next time, put your credit card down and slowly step away from the mall!

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