A few years ago, I was with a client who was considering retirement as she was ready to enjoy the fruits of her labor. Relaxing days with yoga, grandkids and a bit of travel were destined to become her new priorities. Unfortunately, as we ran the numbers, her probability for retirement did not look good. As we dug a bit deeper into her financial situation, the culprit emerged. A new German sedan was planned every five years to the tune of $75,000 during her retirement years. As we were considering a solution, I inquired if she would be willing to think about reducing her car expense to $25,000 per automobile and perhaps every six-to-seven years instead of five. She stated, “No problem, but will that really make a difference?” After running the numbers it made a huge difference, in fact we realized she could retire immediately if she wanted. This situation got me thinking about big life expense and how it can often affect retirement.
Often, it turns out our financial goals, such as retirement success, are more about our behaviors than our portfolio returns. We sometimes go on autopilot and make financial decisions without considering the long-term ramifications. For example, when purchasing a new automobile we may tell ourselves, “I deserve something nice. I work hard and want to enjoy my success.” That is an understandable assertion, after all, most people do not want to be too frugal as to miss enjoying some of the exciting moments that life has to offer. But, is there a middle ground? Can one still enjoy their hard work and retire a bit early? The answer is that it definitely seems possible but at what expense.
Hands down, no question, having a high performance sports car now is more exciting than a robust 401k. For those that can do both, kudos and well done, you are a rarity. For those that may have to make some compromises, please consider the information below.
Let us reflect on the difference between a $70,000 Mercedes, or another fine foreign import and compare it to a more modest Honda Civic or Toyota Corolla that cost $18,000. Other assumptions could include:
- Holding the car six years before buying another
- Trade in value = 30% of original purchase price after six years
- Total of 10 car purchases in a lifetime
- Difference saved will be invested and may earn 8% annually for 65 years
For many of us, change is very challenging and it is hard to break spending habits especially if we are accustomed to living a certain lifestyle. Decisions are typically emotional and turning off our autopilot for spending decisions can be a tough routine to break, but this exercise in conscious change could well be worth the discomfort. At least that is what my retired client from the example above told me as she was sending pictures from her last yoga retreat!