“I’m simply not able to retire. Not yet.” A colleague fast approaching 65 shared that sentiment with me over a beer not all that long ago. The notion of being stuck in a cubicle at that age got me to thinking about my current lot in life.
The Cubert family is fortunate to live in a lovely little neighborhood within the city limits. We can take walks using an actual sidewalk, and appreciate the shade and fall colors from mature, tall trees. The grocery store is a mere four blocks away. The library and fancy booze shop one block further.
The mix of homes is fun to take in and makes for a nice mosaic of sorts. Some houses were built in the early 1900s but are well-kept. Many more sprang up right after World War 2 to house returning veterans’ families. And of course, the latest addition: The dreaded pre (and post) Great Recession McMansion (GRMs – pronounce like “germs”.)
On a recent trot, with the weather now hovering in the 30s (way too early for my tastes), I began to think about what the three things are that make high-earning Americans not able to retire (much less early). Is it as simple as houses, automobiles, and tuition? If I were to try to convince a friend or neighbor to retire early, by avoiding extravagance in these three areas, would it more easily resonate?
We’re not able to retire (early) because…
There’s an interesting mix of social, instinctual, and ego-driven pressures that seem to tug at all of us to upgrade everything in our lives. The president has a knack for this with his wives. Ivana didn’t stand a chance, even after she went as far as to go through plastic surgery to keep him happy.
Some golfers go crazy over the never-ending upgrades in golf clubs. Smartphones and smart watches, flat screen televisions, and other gadgets keep us unpacking foam and cardboard as a weird sort of therapy. Whether we need a bigger house, fancy German transportation for getting stuck in rush hour, or private school (when solid public schools are plentiful) doesn’t matter.
We simply gotta have it. The truly sad aspect of all this? Social media. More than ever, we’re not only influenced by what we see next door, we now get to gaze at everyone’s newest and latest upgrades: vacations, cars, houses, etc. We’re not able to retire because we think we must spend to be as happy as people seem on Facebook. FOMO nonsense.
Would the never-ending cycle of upgrades continue, if people were aware they could punch-out early from their career a good 20 years (or more) ahead of schedule? Perhaps. But I have a suspicion that a good many would consider changing their habits, if they stopped to consider two things: math and contentment.
Not able to retire because: Housing is out of control
With the average size of U.S. houses increasing by a full 1,000 square feet over the last ten years, it’s clear that we’re still willing to pay top dollar for space. Is that space necessary? Again, back to the walk around the block in my neighborhood. I’ll see more than a few lots where the structures have been torn down and solid 1,200 to 1,500 square foot homes have been replaced by a 3,000 or 4,000+ square foot one.
The cost of owning a house that big in the Minneapolis metro area approaches $500,000 with ease. It’s hard enough to justify purchasing the 1,500 square foot home at $250,000 plus. But if you feel you must keep up with the McMansions next door, and sink your dollars into a super-size me house, consider the costs:
1,500 square foot gem: $225,000 loan at 4% interest = $1,074 monthly payment
3,000 square foot HGTV Poverty Brothers home: $450,000 loan at 4% interest = $2,148 monthly payment
How about pesky property taxes? For the big house, expect they will be about double. In our neck of the woods that means you’d pay Mayor McCheese a whopping $6,000 per year to fund our public schools and infrastructure.
Utilities and insurance will be higher as well. You’ll pay about $200 a month on the small house for gas, electric, and water. Even if you assume the same water usage, it’ll cost more to light up, heat, and cool the Poverty Barn. Tab? $300.
Your home owner’s insurance will double as well. That’s because you need to factor-in the cost to rebuild the structure. A house that’s twice as big requires double the materials. So assume you’ll pay $2,000 for Biggy vs. $1,000 for Smalls.
The total opportunity cost per year on the big house comes out to $35,376 vs. $18,288 for the perfectly useful small house. The kind of house our society thrived in, back in the 60s and earlier, with LARGER family sizes. And I didn’t even mention the higher cost to furnish and maintain a big vs. small house. I tacked-on another $4,000 per year vs. $2,000 for that.
Early Retirement “Tax” for choosing that big house? $815,693. This assumes a 20 year window of time, compounding savings at 7% in a good ol’ fashioned index fund.
Stuck in a Cubicle Because: Cars n’ trucks!
The next pitfall keeping you from retiring early is those wheels. Everyone it seems is a pure sucker for a “nice car.” If there’s any ball and chain that’s holding you back from financial success, it’s the f*cking automobile. Consider its purpose: to get you from point A to point B, when your feet or bike won’t suffice.
Consider how the commercials want to have you believing you’ll be zipping around bendy country roads on a sunny day, with no other cars in sight. In actuality, you bring that cash-sucking Audi home and realize you’re just one in a herd of luxury vehicles, stuck in bumper to bumper traffic. At least you have seat warmers to help you make it through until 65…
Choosing instead to drive only when necessary, and in a vehicle that’s in solid shape, paid for, and easy on fuel economy? “Nah, I’d rather flush my hard-earned cash down the toilet on car payments, insurance, premium unleaded, and maintenance. But sh*t if I don’t look cool doing it!”
Let’s use my favorite target, the BMW driver. The 10-year cost to maintain that thing on average? $17,800. Compared to the mighty, serviceable Honda? $7,200. Next, let’s assume you drive 10,000 miles per year, consuming 333 gallons of gas (assume a 30 mile per gallon fuel efficiency.) Paying for premium in your BMW or Audi will cost you $1,028 per year, vs. $852 for regular octane in a Honda.
Insurance? That’ll run you close to $2,000 per year for that luxury beast. On average, the cost to insure a used Honda Fit with no collision coverage is less than $600.
Let’s not forget the cost of the car itself. New BMWs range from 30 grand to over 100 grand. Assuming you go for a modest BMW 3 series, reasonably decked out, you’ll spend about $45,000. A used Honda Fit with less than 80,000 miles will cost you $7,000.
Early Retirement “Tax” for choosing that fancy car over a used Honda Fit? $258,806. Again, assuming a 20 year window of time, compounding savings at 7% in a boring (but effective) index fund. And by the way, this assumes your average couple drives just one luxury car. I’ll go easy on you and figure at least one car in that garage is a used, paid-off mini-van.
We should pause for a bit. Adding up the opportunity costs so far, you’re already down $1,074,499. You ever wondered how to become a millionaire by the time you reach your 40s?
Stuck in a Cubicle Because: Tuition will keep you wishin’ instead of fishin’
The third thing making you not able to retire early is tuition. Don’t get me wrong, it’s a really good thing to set aside money to help your children get a leg up on college costs.
We plan to fund at least half of their higher education with 529 accounts. The rest we hope will be covered with a few scholarships and some part-time work, plus summer jobs. They might wind up with some debt coming out of the deal, but nothing in the six figures.
In-state public universities still seem to offer pretty good value. A healthy number of people who boss me around and make close to, or more than $200,000 per year went to the venerable University of Minnesota or St. Cloud State. Had they been alums of Harvard or Yale, who knows? Maybe they’d be pulling in $2 million a year, or working for a D.C. lobbying firm?
Realistically, they’ll make about the same salary, but be saddled with much higher debt. If you’re skeptical on that last point, consider this handy little article when Junior starts looking into school choices: Is an Ivy League Degree Worth it?
Then there’s this idea that you need to put your kids through private school, to make sure they get into a prestigious (but low value) private college. Man. I couldn’t fathom that, now that we pay $4,000 a year in property taxes. Don’t fall for that bullsh*t. Some will argue that you get more nurturing and the teachers pay more attention, blah blah blah.
Well, I’m here to tell you that teachers at public schools are pretty f**king great too. Yes, sometimes you get large classroom sizes. And sometimes you get bullies, cliques, and other distractions. But you know as well as I do that that’s par for the course in ANY school, save for home-schooling.
I know more than a few families struggling to even contemplate retirement in their sixties because they felt compelled to put their kids in a supposed safe learning environment, where nothing bad would happen and they’d wind up successful little lawyers and doctors.
Turns out their kids either wound up on drugs, still living at home, or at best, obtaining no better work than someone who grew up going to public school. The sad result of flushing all those tens of thousands down the drain is that mom and dad can’t imagine retirement until 75. Thanks, kids! Go read THIS to get you thinking even more deeply about this topic.
Early Retirement “Tax” for choosing private K-12 education for Johnny and Sally? $322,971. Of course, I’m sure you’ll spill your beans to pay their bills at Princeton and Cornell too. Cuz, you know, you really can buy ambition, work ethic, and curiosity according to the marketing. Sigh…
Total Early Retirement “Tax” of the Big Three: $1,397,470
Not able to retire? There’s another path, should you choose…
Pretty nuts, huh? That $1.4 million doesn’t consider your shopping habits, dining out habits, and extravagant vacations. Throw in those lifestyle inflators and you’re probably sinking $2 million easy that could instead be used to power an early retirement. Remember the value of early retirement for the individual, the spouse, and the parent: Time is infinitely more powerful than money.
Be the supplement to your kids’ public school education. What your kids learn from YOU is more important than their grade school curriculum.
Be the support to your spouse, if he or she continues to work beyond your early retirement. Be a better, less stressed version of yourself, knowing you’ve achieved what very few have, since the Industrial Revolution.
Are you able to retire early? Or simply unwilling?