It's Not What You Spend, It's What You Don't Spend That Counts
By Larry A Ferstenou
Copyright © 2003. All Rights Reserved.
Reprinted here by permission.

A rule of thumb among financial advisors is that, when you retire, you need 70 percent or more of your pre-retirement income to maintain your lifestyle. But whether or not that rule will apply to you depends on the lifestyle you choose to live both before and during retirement. The 70 percent rule will most often apply to those who lived at or above their means during their working years and who choose to continue doing so in retirement. It will least often apply to those who have lived below their means and who continue to do so in retirement.

My wife and I are a good example of the latter. We retired over ten years ago and found the 70 percent rule to not be the least bit accurate for us. And that's a good thing, too. We retired in our early 40s and, had we needed 70 percent of our pre-retirement income, we'd still be working full-time and hating every minute of it. Instead, we have enjoyed immensely the freedom and control over our lives that these past ten years have allowed us. So let's look at this 70 percent rule of thumb relative to our situation to illustrate how living below one's means can make the difference in when and how one can retire.

Live Below Your Means

Over our 18-year careers, my wife and I together averaged $47,300 per year in after-tax income. Like most people, we earned significantly less in the beginning and far more at the end of our careers. According to the 70 percent rule, and based on our income the last three years before we retired in 1993, we should have needed $53,000 per year to maintain our lifestyle. Are you kidding me? The fact is, we never spent anywhere near $53,000 any year in our lifetimes. If we had made a habit of that, we wouldn't have been able to afford to retire! So why would we need that much in retirement? Here's why the 70 percent rule didn't apply to us and why it won't apply to others who simplify their lives and live below their means.

Kris and I have kept detailed annual records of income and expenses since the onset of our marriage in 1976. For anyone who wants to save more money for long-term goals like retirement, I strongly recommend the same. The following chart summarizes our income and expenses for two periods of our married life: our leaner earning years (1976-1985) and our peak earning years (1990-1992).

	Leaner Years (1976 - 1985)	Peak Years (1990 - 1992)	Difference
Avg. Annual Income	$27,700	$75,800	$48,100
Avg. Annual Expenses	$18,000	$29,000	$11,000
Avg. Savings Per Year	$9,700	$46,800	$37,100
Percent Saved	35%	62%	27%

During our ten leaner years, we were earning an average of $27,700 per year. Since that was after-taxes, it was discretionary income that could be spent however we wanted. Our detailed records reveal that we spent $18,000 and saved $9,700 per year on average. Needless to say, we lived below our means; we spent about 65 percent of our income and saved 35 percent. As our income grew over the years (which is true for most households) and we hit our peak earning years, how did spending change?

Earn More, Spend Less

In our three peak earning years, our income averaged $75,800 net of taxes; obviously we had a sizable amount of discretionary income. Had we lived consistent with our means, we would have spent it all ($48,100 more than during our leaner years). We could have even spent above our means and tapped out our credit cards. But you'll notice in the chart that our expenses increased only $11,000 per year while our savings increased $37,100 per year. The fact is, we were spending only about 38 percent of our pre-retirement income when we could have been spending 100 percent. We increased our standard of living some, but we increased our retirement accounts far more.

If you're thinking we must have lived like paupers, you're mistaken. Kris and I had a beautiful house in an upscale neighborhood in California, two decent cars, and pretty much everything we wanted. But then, we obviously didn't want or need as much as most people do. The 38 percent of our income that we spent (about $29,000 per year), was plenty for us to be happy and it was sufficient for two people looking at the long term and saving for the goal of retirement at age 50. Since we had what we needed and didn't need more, why would we need $53,000 in after-tax income to be happy when we retired in 1993?

Most retirees find that their expenses decrease after they leave the workforce because they no longer have work-related expenses. In the ten years we've been retired, we've lived on less than $22,000 every year. We still have a nice house in a good neighborhood, a quality vehicle, and pretty much do and have everything we want. Yet, our annual expenses over the past ten years have averaged only 26 percent of pre-retirement income. If we wanted to, we could spend an extra $22,000 per year on travel and still only be at 52 percent of our pre-retirement income. So much for the 70 percent rule.

The Choice Is Yours

Will 70 percent of your pre-retirement income be a necessity the day you decide you no longer want to work? That depends on the lifestyle you choose both during and after your working years. If a need for material possessions and keeping up with the Joneses dominates your life and income, then the 70 percent rule is one you should plan for. However, if you simplify your life and live below your means, you can probably forget that rule of thumb just like we have.

As the title of this article says, it's not so much what you spend but what you don't spend that counts. If you want to enjoy a comfortable retirement without needing a high percentage of your pre-retirement income, then simplify your life, find lower-cost hobbies and interests, and live below your means. Otherwise, that need for at least 70 percent of your pre-retirement income may keep you working well beyond the day you'd much rather quit.

About The Author

Larry Ferstenou retired eleven years ago at age 42 and is the author of You CAN Retire Young: How To Retire in Your 40s or 50s Without Being Rich (American Book Business Press, 2002). For more information visit the You Can Retire Young web site.

Web Site: www.youcanretireyoung.com