A few days ago I was discussing the economy with an office mate, and he said something interesting:
Did you know that we are the first generation that won’t ever retire?
After I finished laughing, I dug in an asked him why he believed this. As he explained his opinion (which was sourced by NPR), what he said saddened me. How he said it also saddened me. He spoke as a victim to a system that was using him as a slave, a system that will use him for his entire life and throw him out when he is no longer of use. Sadly, he’s right (sort of). And I just wanted to scream: It doesn’t have to be this way!
Here’s a few facts about my friend:
- He drives a truck that gets 20 miles per gallon. Worse, he commutes 50 miles to work each way.
- He spends $1000/month on groceries, and another $200 eating out
- He owns a $300K house, and his mortgage is about $1600/month.
- I don’t know for sure, but I suspect he makes about $90K/year given his position at our company
At this point, I wanted to show him my story, but unfortunately it’s still important for me to keep my retirement plans under wraps at work, otherwise it would make things a little awkward.
Before we declare him a victim, let’s break down some of the numbers:
100 miles to work 5 days a week comes out to 500 miles per week. I don’t normally use the IRS value for cost of commute, but since he drives a 2010 truck that is both inefficient and depreciating at an astonishing rate, let’s say $0.50 per mile. This is equivalent to $250/week, and roughly $1000/month.
I asked him about his grocery budget, and he said it’s not possible to reduce because his wife loves to cook. Perplexed, I asked why her love for cooking couldn’t be steered in the direction of cheaper ingredients. He didn’t really have an answer for this. I didn’t suggest to him that he just eat rice and beans (although a good bowl of rice and beans can be pretty satisfying), but perhaps he could lay off the red meats, , truffles, and foie gras. Let’s say a reasonable budget for a family of four that loves to cook is $500/month, and let’s reduce their restaurant budget to $100/month. This would be an additional $600/month saved.
His $300K house is too much. Besides increasing his heating bills, it requires more time to clean and more stuff to fill it. His family is the same size as mine, with 2 small kids, therefore I know he could easily fit within my $200K house quite comfortably. My mortgage is $870/month, including taxes and insurance. This means he could save an additional $730/month.
If he were to simply downsize his house by purchasing a new one close enough to our office to walk or bike to work, get rid of his truck (or at least not drive it to work), and eat a simpler diet, he could be spending $2300/month less. (BTW, this is before accounting for all the second order savings that come with less driving and a smaller house). Using a safe withdrawal rate of 3%, this is equivalent to a savings of $920,000 (multiply monthly expenses by 400).
As I mentioned earlier, my friend makes about $90K/year. Just to keep things simple, let’s say it’s $60K after taxes, which works out to $5K/month. I know he has no savings beyond the 4% he puts into his 401K, which the company matches. So, basically, he requires $5000/month to “get by” with his desired lifestyle. With all this added up, he’s correct in the assumption that he’ll never retire.
Now, if he made the changes I suggest he would instantly be saving $2300/month, nearly half of his entire income. At a 50% savings rate, he could retire in 22 short years. At 38 years old this isn’t ideal, but it’s a hell of a lot better than never retiring at all.
In the end, my friend is right. Many people in my generation will never be able to retire, or will be so old and tired that it won’t be much fun. Their prime years will be past them, and their kids will already be too busy working towards their own non-retirement. He’s also right that he is a victim, but he’s pointing his blame in the wrong direction. He’s not a victim of the economy or “the system,” he’s a victim of his own beliefs on how life should be lived, and what choices he has in front of him.
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