Got Enough for Retirement? Check Your Spending Habits

Nick Hopwood, CFP® | June 07, 2017

People are always asking me, “Do I have enough to retire?” They expect me to be able to look at their 401(k) statement and give them a yes or no answer in two seconds flat! The truth is it doesn’t matter how much money is in your 401(k). In my opinion, what matters most is your spending habits. If you can live comfortably on Social Security (and pension), then most likely you will have enough to last throughout retirement. However, our culture is a culture of spending.

We carry credit card balances, take loans from our 401(k), and strip equity out of our homes.
We don’t contribute enough to our 401(k) to take advantage of the match.
Pensions don’t exist like in the past.
We don’t start investing soon enough.
We never pay off our mortgage. (For more from this author, see: Should You Retire With a Mortgage or Pay It Off?)

If we can’t live within our means during our career, how do we expect to live within our means during retirement? Who would want to retire to a less extravagant lifestyle? The fact is people expect to maintain the same lifestyle in retirement as when working, it is just human nature. However, If you are a saver, you probably lived within your means during your working years, which means you have a good shot at a comfortable retirement.

The Spender

Once I realized how important investing for my future was at age 45, I started to put 10% into my 401(k) plus the match, but cash flow was always tight due to my never-ending bills. There was never an emergency fund and there were always credit card bills coming in the mail. I was constantly applying for credit card balance transfer promotions. I have a very nice home, but there is little equity due to my refinancing addiction and now I’ve just retired with a brand new 30-year mortgage after the latest refinance to lock in below 4%.

Social Security benefits are enough to pay the mortgage, but that is about it. In order to pay my other bills, withdrawals from the portfolio are required. Of course, all of my portfolio is in my IRA because I was not disciplined enough to save any money out of my paycheck besides my 401(k). Therefore, each withdrawal is 100% taxable. Wouldn’t it have been nice to have a non-retirement brokerage account I could be drawing on now without every dollar being taxable? We are withdrawing over 5% from our IRA, of which 100% is taxable in retirement. (For related reading, see: Not All Retirement Accounts Should Be Tax-Deferred.)

The Saver

Since my very first job, I have been saving 10% in my 401(k), plus the match. I never carry credit card balances. I use a credit card for all my purchases, but I pay it off every month and I collect dividend “points” from using my card. I carry an emergency fund balance of six months expenses in case of a layoff or disability. I max my Roth IRA each year, max my HSA each year, and we also have a brokerage account where we invest a couple hundred dollars each month. Finally, we pay extra on our mortgage every month, which reduced the term from 30 to 15 years.

When I retired, our mortgage was paid off and we were entirely debt-free. Social Security pays our bills—property taxes, insurance, vehicles, etc. We have a large portfolio consisting IRAs, Roth IRAs, HSAs and our brokerage account. We need a reasonable amount each month to fund our discretionary spending such as entertainment, gifts and vacations. Our withdrawal rate from our portfolio is about 2% and we have a variety of accounts to manage our taxes. (For more from this author, see: Using Your HSA as an Investment Account.)

The Saver Makes Better Decisions

The spender and the saver are both smart people and both earned a good living, but the spender’s lifestyle was more extravagant than the saver’s. Look at the difference it makes in retirement: The saver is able to maintain the same level of spending with less taxes and less worry when market volatility is high.

Main culprits of excess spending:

Latte – spending $4.00 on coffee each day is too much!
Second home – wouldn’t it be more cost effective to rent during the winter in Florida than to buy a condo?
Mortgage – refinance after refinance extends your payments forever. Focus on payoff, not payment.
Kids – leading up to retirement, it is time to cut the kids loose. No more loans (which usually will be forgiven). They have 30 more years until retirement and you are there today.
Vehicles – if you are only driving a few thousand miles per year, why are you leasing? If you have three vehicles, couldn’t you get by with two? Each vehicle adds insurance, registration, maintenance, storage, etc.
Eating out – isn’t it nice to have a nice dinner at home once in awhile? (For related reading, see: How Cooking at Home Can Save You Real Dough.)

Summary

The answer to the question, “Do I have enough,” does not depend on your account size, it depends more so on your spending habits and decision-making at a younger age. In order to evaluate your spending habits, you must track them either with a spreadsheet or a phone application. If you can’t cut out any expenses, consider working longer or consulting in retirement.

(For more from this author, see: Why a 10% Deferral to Your 401(k) May Not Be Enough.)