According to a recent USA Today article, the average American in retirement lives on $32,000.00 per year. Let that sink in a second. That’s $2,666.67 before taxes. Assuming a 10% tax bracket, that’s $2,400.00 per month.
In an attempt to illustrate the standard of living that $2,400.00 per month can bring, I put together 2 different budgets for two hypothetical seniors living the “Average American Retirement.”
Senior #1 Senior #2
Rent/Mortgage $ 750.00 $ 0.00
Car Payment $ 300.00 $ 0.00
Gas/Electric $ 150.00 $ 150.00
Medical Expenses $ 250.00 $ 250.00
Food $ 250.00 $ 275.00
Entertainment $ 100.00 $ 400.00
Gas/Fuel $ 75.00 $ 75.00
Clothing $ 50.00 $ 100.00
Cell Phone $ 60.00 $ 60.00
Cable/Internet $ 100.00 $ 100.00
Gifts/Charitable $ 50.00 $ 100.00
Home/Car Repairs $ 50.00 $ 100.00
Car Insurance $ 75.00 $ 75.00
Haircuts $ 40.00 $ 75.00
Total Remaining $ 100.00 $ 640.00
It is clear to see from the illustration that it is easier to be Senior #2 than #1. The biggest difference is that Senior #2 has paid off a home as well as a car. These to payments equate to 44% of Senior #1’s monthly budget. The lesson we can learn here is that it does not pay to take debt into retirement. Keep in mind that we may not all be able to work as long as we want, so we need to do our best to set up our future selves financially right now.
Car payments are not a necessary evil. It is well within the reach of most people to save up and pay for a car with cash. Granted, the car isn’t going to be brand new with a sun roof, navigation, and air conditioned seats most times. However, even if you have to settle for a car that is $5,000.00 that you can pay for in cash….do it. Many people have a car payment of $400.00. So long as your clunker lasts more than a year, you were better off to pay cash than to finance it. Also, when you finance a vehicle you end up spending a lot more money because of those low monthly payments. Remember, financing purchases simply reduces your future cash flow. Pay cash for cars and you will enter retirement in much better shape.
The other huge expense that average seniors aren’t going to be able to afford without hardship is a rent or mortgage payment. While it would be great to be able to buy a house with cash, this isn’t a reality for most average wage earners during their lives. However, most people finance a home over a 30-year term. As a result, it should be possible to retire without a mortgage. The key here is not to refinance and take equity out of your home along the way if you can help it. Continue to make those payments month after month and, even if you can’t afford to make extra payments toward the mortgage, you should be in a position to live without a mortgage during retirement.
So, what if you are reading this blog and you want to retire in 5-years and your car won’t be paid off for 3- years and your home won’t be paid off for 8 years? The first, obvious answer is for you to work longer until your home is paid off. However, if you cannot physically work for another 8 years, there may be a solution. Concentrate now on eliminating your vehicle debt. That may be through selling your vehicle and purchasing a less expensive vehicle. It may also be through concentrating on paying off your vehicle and then taking the extra funds each month that you used to spend on your car payment and paying them on your mortgage. That way, you can probably eliminate 2-years of mortgage payments. The last, least effective method would be to continue making the regular payments each month on your car and your home and then minimizing your expenses so that you can continue to pay for your car and home during retirement.
If you are years away from retirement it is my hope that you can use the above-budgets to determine that living the life of an “average” American in retirement isn’t for you. Do what you can not to set aside funds so that you can enjoy retirement with less financial stress.
It is also worth noting that if a health issue or some other issue outside of your control has forced you to retire early and you have a lot of debt that you can no longer pay, that there are options. It is important to speak with an attorney familiar with Indiana debtor/creditor law about these options. If you are a resident of Central Indiana including Indianapolis, Carmel, Zionsville, Fishers, Noblesville and would like to set up an appointment at our Carmel, Indiana office call (317) 575-8222 or click here.