Some people view retirement as an end goal -- something to work toward; a kind of dream life. Maybe you want to spend your days golfing or perhaps you just plan to sit on your porch in a rocking chair.
No matter what you plan to spend your time doing in retirement, you need money to do it. Even if your hobbies are cheap and you plan to spend modestly, you still need a roof over your head, food, healthcare, and enough to cover other expenses.
To be prepared for an early retirement (or any retirement at all) you need to make some sacrifices right now. Saving and investing are, of course, at the core of everything, but doing this one thing can have a huge payoff.
Live in less home than you can afford
Housing is likely to be your single biggest monthly expense. That means that opting for less house than you can afford can lead to huge amounts of money for your retirement accounts.
My family, for example, opted for a small two-bedroom and a den condo on edges of downtown West Palm Beach. By giving up space and being not quite centrally located, we saved about $100,000 in purchase price that could have gone toward a true third bedroom, more square footage, and a location in the heart of the action.
By opting for our still very nice, but less than we could afford, condo we also saved a bit on our homeowner's association fees. We pay about $800 a month for our 24-hour doorman, clubhouse, gym, pool, and a few other minor things. In a true downtown building, we'd have a much smaller pool and gym and would pay $100 to $200 more per month.
Let's assume we save $150 per month in HOA fees. That alone adds $1,800 per year to our bottom line.
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The numbers, however, become truly compelling when you look at what we have saved by having a smaller mortgage. The $100,000 per year we did not borrow at 3.5 interest (a rounding on what we actually pay) saves us $4.49 per month per $1,000 not borrowed. That's $53.89 per year times 100 or an added $5,389 per year we're not spending.
Taken together, making two small sacrifices (space and location) puts roughly $6,939 in our bank account each year. If we put that money toward retirement that's an added $208,170 saved over the life of our 30-year mortgage before you consider how we invest the money.
How big can it get?
Since my wife and I are both 46, let's look at how our money might grow over 20 years. If we round up our savings to $7,000 per year and assume a modest 7% annual rate of growth, we will have almost $287,000 when we hit 66.
If you assume a 9% return (which is roughly what the stock market averages over extended periods) then you end up with $358,000. Both are significant amounts of money that would clearly help you fund your retirement.
This is an extreme example, but every dime you spend instead of saving pushes your retirement further down the road. Having a more modest home might be the biggest single move you can make but it's really part of an overall philosophy.
You can drive a practical car and keep it longer than you would like. You may also consider free or low-cost college options for your kids and plan more modest vacations. It's not really important where you decide to make cuts to find more money to save. The idea is that you should find ways to sacrifice in order to make your long-term retirement goal easier to attain.
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