Should you invest additional money month over month, increasing your investment contribution so that you can retire from your job earlier or should you downsize to reduce outgoing cash flow?
In my opinion, both. But let me tell you why.
If I reduce my costs or expenses that go out month over month, then I am also reducing the amount of money needed to actually retire on, so the amount I will need to invest changes. If I am going to work until I am 65 or 70, then the amount I will need to invest is small month over month if I have a small expense list. If I have a lot of bills every month and I’m riddled with debt I’m constantly having to pay on like high-interest credit cards and evil car loans then I have less to invest with and I obviously need more cash or income every month just to get by. But this also means I will certainly have to work until I’m 65 or 70 because I’m having to pay on said debt. Clear as mud right!
To clear said ‘mud’ up a bit lets provide an example. Say I have a household income of $60,000 a year after taxes. The average household income which includes both parents working. I know some make more and some less, but this is the average. Both have cars which are financed, the average car payment is right around $500 a month. Since both have cars that are financed, that $1,000 a month just in car payments! That $12,000 a year, gone… Now add on full coverage insurance for the cars which is another $200 a month, there’s $2,400 a year. That’s already about $15,000 of our income, out the window. Now tackle credit cards which the average American household has 6 credit cards. Have you noticed we haven’t even started paying on the bills we need to pay just to survive such as home, food, water, electric, nor have we gone over insurances, clothes or travel costs. Our average apartment rents are $1,200 per month for a two bedroom apartment and for a three bedroom home $1,500 per month in a mortgage. Personally, I think we are in another housing bubble because we didn’t learn from the last one.
Debt payments, take away the number one asset building tool we have; our income. But, what if we were to downsize? What if we bought a small tiny home on a small piece of land we paid cash for. Or RV or toy hauler? Now I don’t have rent or mortgage payments to contend with. The big house doesn’t impress anyone because honestly, nobody cares about your home or fancy clothes. Only you and your ego care about how big your home is or if you have the latest fashion line. What if I paid off my debts, my credit card debt, car loans debt. What is instead of $30,000 of my family’s income being paid out in debt payments could be utilized on investing for our future? Check out my post on investing for my compound interest spreadsheet. But just for a quick summary, $30,000 divided out over 12 months is $2,500. If I placed that same $2,500 inside my investments, starting from absolutely nothing, making market index average returns each year, I would hit the one million dollar mark in just 14 years and hit the 2 million dollar mark, just shy of six years later. That where you’re paying your debt payments to. Making other companies and bank filthy stinking rich off of your monthly payments.
On the flip side of that, if you didn’t have to pay all of those monthly payments out each month, would you really need a million dollars in order to retire?….. The answer is a resounding, no. Without major debt expenses you income need reduces. Getting all of your income needs down to the basics, as in Electric, water, food, travel expenses, little entertainment each week. How much do you really need for that? Each month, roughly $2,000 a month, on the super high side. If all of your expenses only added up to $2,000 each month, going on the safe withdrawal rate of 4% from your investments, total assets to pull from $650,000. This actually gives you a little more than $2,000 each month pulling out at 4%. This leaves money in there still growing as well because the markets on average make more than 4% so effectively you’ll never run out of money.
If you have enough month inside your investments to pay your bills each month at only using the safe withdrawal rate of 4%, then you can effectively retire. So reduce debt payments, eliminate them then invest heavily. once your ready to retire then go retire from what you have to do and start doing what you love to do. If your lucky enough to love what you do, then never retire.
Let me know what you think. Agree, or disagree?
E.W. 