I love money. I love everything about it. I bought some pretty good stuff. Got me a $300 pair of socks. Got a fur sink. An electric dog polisher. A gasoline powered turtleneck sweater. And, of course, I bought some dumb stuff, too. –Steve Martin
Tackling this topic is not very smart. I’m certain some of my readers will disagree with some of the points I will make. Again, my thoughts are all subjective. I share them only to give you a starting-off point or an example of one way to go. People worry about money for all different reasons and most of the time, those worries are valid. I’m often asked how I was able to retire when I was 58 years old.
Average Retirement Age in the United States – DQYDJ – DQYDJ.com
With the average age at 59.88 years old, there are people retiring a lot older and a lot younger than I was. I was fortunate to retire earlier than the median age of 62. This is how I did it:
Your Retirement Fund — When you’re in your 20s the last thing you’re thinking about is retirement. You’re wondering how you’re going to pay off your college loans, whether or not you’ll have rent money, where you’ll get the money to fix the car — you get my point. But honestly, if you want to retire at an earlier age, you have to put some money into a retirement account as soon as possible. It almost has to be like a car payment or rent. It takes discipline. I understand that for some people, this isn’t even a remote possibility. Whenever I received a pay increase, I raised the amount my employer took out of my salary for my 401K (I was fortunate to have employer contribution matching for 20 years of my career, I understand that it’s rare for employers to match these days). Because they deduct the money pre-tax, you pay less taxes on your income. You are not taxed on the money until you retire, at which point you will theoretically be drawing less annually and therefore, you will be in a lower tax bracket. Let’s just say that if you are single and you are not responsible for others, you might be able to do this.
Side note: financial advisors told me that upon retirement I needed to be able to draw two-thirds of my annual salary in order to maintain my lifestyle. I always thought that was a crock and that they told you that so that they (and their companies) would earn more money. Most financial firms charge you an annual percentage of your savings; the more you have put away, the better they do. I guess you can’t blame them for that. I have found that my needs and desires have changed as I’ve gotten older. It doesn’t hurt that I now live in a country that is far less expensive than just about anywhere in the States. Also, I caution you to do extensive research on financial institutions. There are a lot of bad players out there and the last thing you want is to see the money you worked so hard to save, disappear.
Borrowing — When big life decisions come up, like buying a car or a house, you cannot take the money out of your retirement account. I learned this lesson the hard way. The government will penalize you in two ways: first, you’ll have to pay a ten percent penalty for early withdrawal, and then you’ll have to pay tax on the money as if you’ve earned it — it can turn out to be thousands of dollars that you do not have. When you’re young, it’s easy to tell yourself that you can use your retirement savings and worry about it later — it’s a bad call. An alternative is a retirement fund that allow you to borrow from them (research your fund). In essence, it’s like you are the bank and you are loaning yourself money. When you pay back the loan, you are paying interest to yourself. So you are paying for the loan, but at least the payback money is going in your pocket. Keep in mind that the amount you’re borrowing has no earning power while you are paying the money back. Some whole life insurance policies offer you the same benefit. It’s better to avoid this option altogether if you can. And by the way, do not get suckered into a whole life policy as a way to save for the future. Term life is a cheaper and better security blanket for your family. And if your employer offers life insurance as a benefit, don’t count on that policy to take care of your family. If you lose your job, you lose that insurance. Therefore, you should either have money in savings to protect your family or term life insurance (if you’re young and healthy, it’s fairly inexpensive).
Saving — Save for the things you want to buy. Buying on credit is expensive and debt piles up quickly. There are guidelines about percentages of your salary that might be helpful, but we all know that you can only save money if you have money to save.
Budgeting — Budgeting is a big deal. It allows you monitor the funds coming in and going out. You’ll know what to put aside for the essentials and you’ll hopefully know what will be left at the end of your pay period. I always overestimated my utilities. I knew that my electricity bill would be high during the summer months because I hate heat. I knew my AC would be cranked and frankly, I’d pay for AC before I would buy new clothes or take a trip. Your budget should be adjusted whenever you have a major financial change (pay increase, rent increase, mortgage, etc.). Spending within your means is essential. People end up under water because they spend more than they earn.
Frivolous Spending — Small extravagances are dangerous. I remember working with people who stopped at Starbucks on the way to work everyday. They spent $10 a day at a coffee shop everyday and that was breakfast 10 years ago. That adds up to $200 dollars a month for coffee and a breakfast sandwich. I always made coffee and had oatmeal or cereal at home; saved me thousands over the years. That’s just one expense — think about all of the others you can avoid or live without.
I have used frivolous spending as a reward I dangled in front of myself if and when I achieved long and short-term goals. If I had a great meeting at work, I’d treat myself to a morning cappuccino. It makes for a sweet reward and a little private celebration. If I achieved a big goal (like my Ph.D.or a big promotion at The French Culinary Institute), I’d treat myself to a nice vacation or I would upgrade my car. I’ve never really cared for fancy resorts. I was once treated to a few days at a Ritz Carlton Resort in Arizona. I ordered a cocktail poolside and it was $25; I thought to myself, I could have bought myself a new shirt for that much money.
Credit Cards — Credit card debt is the worst debt you can have. Well not true, if you borrowed money from my mother’s friend Vinnie in Brooklyn and had to pay him back twice what you borrowed, that was pretty bad. The problem with credit cards is that they allow you to pay back a minimum amount each month and before you know it, your debt is greater than your monthly income. I once gave all of my credit cards to a friend and I told him to never give them up, even if I begged. Spending can become an unwanted addiction. Keep one or two low interest cards to have for travel and emergencies. There are also cards that draw from your checking or savings; even better.
Mileage programs — Credit card companies and airlines have become very greedy (I know, they always were). There was a time when your miles meant something. Now there are enormous fees that come along with “free” tickets or hotel rooms. I personally like hotels.com; you get a free room after you’ve booked ten nights using their service. The fees and taxes you pay for your free room are nominal — I’m wondering how long this program will last.
Going Out — Going to bars will set you back. A night at the bar could be outrageously expensive. If the point is to hang out with your friends, you should consider taking turns hosting. Beer in the supermarket is a lot cheaper and a bottle of vodka can go a long way. Don’t do take out — way too expensive. Some sandwiches or snack foods will save you lots of money. It’s not being cheap, it’s being smart (just to make you jealous: a beer at a bar or cafe in Faro is one euro or 1.50 euro; a mixed drink is usually 3 euros and sometimes even less. Crazy huh?
I was at a bar with friends in New York City last year and I decided that since they all came to see me, I should buy a round. I looked at the check to see what I should tip and the check was over $100 — sticker shock!
Eating in Restaurants — I love eating out; as does most of the world. Letting someone else cook and do the dishes is quite a treat. I know people who never cook or eat in and I have to say I’m a little jealous. Similar to drinking in bars, eating out can cut into your savings or add to your monthly budget. If you’re trying to save for a house or a college education, you might consider either cooking more or eating at less expensive restaurants. I love my own cooking so this isn’t too much of an issue for me. When I lived in New York and Maine it was difficult to avoid eating out a lot. When I was at the French Culinary Institute I had to eat out to keep up with our alumni and current food trends. Then of course, most of my friends are big time foodies and most of our social activities centered around food and eating out. Every once in a while I would suggest taking a long walk or eating in just to mixed things up a bit and save some cash. Keep track of what you’re spending at restaurants. When you look at the amount, it may help you cut back.
Vacations — I love Airbnbs because I can cook some of my own meals. So many benefits if you like to cook: you know the ingredients are fresh and you can save lots of money. I also do a lot of research on off-season bargains, etc. It’s so important to get away; it’s a great way to gain perspective and escape from your worries for a bit. For me it’s always been a good excuse for allowing myself to shut down. It’s also a great opportunity to spend leisure time with friends. I also get extra satisfaction from having snagged a bargain.
Generosity — If you’re from a big family, there are lots of weddings, showers, birthdays, anniversaries and different ways to celebrate. And then there’s Christmas, Hanukkah, bar mitzvahs, oy vey. Being generous and buying expensive gifts is great if you have a load of cash, but let’s face it, few of us do. Gift giving should be more about showing someone you care with a token gesture, but it’s become competitive and sometimes the expectations are unfair and unrealistic. For example, if you don’t spend a lot of money on a unique Valentines gift, it means you don’t love your partner. Sometimes a discussion about limits and expectations is warranted in order to keep things reasonable. More communication is always better. I think it’s great to be generous, but also prudent to live within your means.
Keeping Your Eye on the Prize — If early retirement or retirement in a beautiful place is your goal, keep it dangling in front of you at all times. What will it take to get there? How much do you need to put away annually? Where can you cut back in order to get there faster? Entice yourself with photographs and journal entries describing what it will be like.
What I Might Have Done Differently
Regrets are a waste of time and it turned out pretty well for me despite the mistakes I made, but for your benefit, the following are some things I might have done differently:
- I should have started savings earlier.
- I spent a lot of money on a Whole Life insurance policy thinking it would grow over time and benefit me in retirement. It was a waste of money and I eventually cashed it in.
- I spent a lot of money on silly gadgets (i.e. kitchen tools, TVs, electronic equipment) throughout my life. I wish I had been a bit more prudent.
- I spent way too much money on “the other guy” in relationships; oh well.
- I had a little country house in Pennsylvania for ten years. If I could do it over, I’d rent. Buying a second home is great for entertaining and bragging rights, but it is very expensive and a lot of work. I spent most weekends doing repairs and taking care of the yard; hardly a place to relax and unwind (although I did enjoy some good times there).
- Sometimes I forget to check to see what I have in the refrigerator or pantry. I end up buying too much of something and end up having to throw away food that is no longer fresh.
- I’ve always enjoyed casinos and I’ll leave it at that.
Note: My brother and his wife are visiting from the States. I told my brother I was writing this blog and this was his reaction:
“Chris, you don’t understand, the only person you have to take care of is yourself. I have a wife, children and grandchildren to care for. It’s a lot harder for me bro.”
This is the reaction I feared. I’m hoping my readers can find something helpful here. If I missed anything, please chime in.
I see the moon over Faro (left) in the morning (back view) and the sunset over the Ria Formosa in the evening (right, terrace view) and it makes all the sacrifices I had to make to get here worthwhile.