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The Biggest Expenses That Will Impact Your Ability to Save for Retirement

4 min read

Reading about saving for retirement makes everything seem so simple. You just save a portion of your paycheck, invest the money in productive assets, and watch your retirement assets grow. Piece of cake, right? But most of us realize that it’s not so simple.

That’s why it can be so infuriating to read stories about people who claim it’s easy to save enough to retire by age 40. The formula seems to be, just find a job that pays $200K a year and offers an automatic 10% 401(k) match, set up a six-figure side gig, and watch the money roll in. And it’s so easy anyone can do it! Yeah, right.

But saving for retirement doesn’t have to be super difficult either. There are two aspects of retirement savings, income and expenditures, that we need to pay attention to. And while we may not be able to increase our income, we can certainly reduce our expenditures. In fact, even those making nice six-figure incomes aren’t always able to save and invest as much as they should, because they’re spending more money than they should.

Those who are most successful at saving and investing for retirement are those who are able to minimize the amount they spend, maximizing the amount of money they’re able to save and invest. Here are the biggest expenses that can quickly drain your ability to save and invest.

1. Housing

Among those who are able to save the most for retirement, the number one expense they scrimp on is housing. That’s probably no surprise, as housing is often the top expense for most American households. More than 10% of American households spend more than 50% of their income on housing, a rate that is considered severely burdened. And in high-cost neighborhoods, even those making decent money often find themselves overburdened with housing costs.

But even households that aren’t considered overburdened can find themselves paying a huge amount of money for housing. Anything up to 30% of monthly income is considered not excessive. But that 30% rule is based on gross income, not after-tax income. If you’re making $100,000 a year and paying for health insurance, your take-home pay may only be $60,000-70,000. According to the 30% rule, spending $30,000 a year on rent isn’t considered overburdened. But that could be 40-50% of your take-home pay, putting a severe crimp on how much you can save for retirement.

Those who are able to save a lot generally save on housing costs by buying smaller houses. They realize that while it’s nice to live in a spacious home, they can make do with less. Smaller houses mean smaller monthly mortgage payments, lower insurance and utility payments, and less money spent on maintenance and upkeep. Buying a smaller house can pay real dividends in the future.

2. Cars

Minimizing costs on automobiles is the second way that most households minimize their expenses. The number one expense when purchasing a new car is depreciation. The moment you drive that new car off the lot, its value begins to fall. And some cars depreciate far quicker than others.

You may love that $60,000 luxury car, but three years later you might be lucky even to get $30,000 for it. Is it really worth $833 a month to buy that car? Even worse, if you financed the car rather than paying cash, you’ll be making monthly payments of both principal and interest in addition to taking that $833 a month depreciation hit. So the real cost of ownership could be more than double what you think it is.

A $60,000 car loan for 5 years at 5% interest means $1,132 per month in car payments. Add depreciation and you’re paying $2,000 a month for a car. In many areas of the country you get a pretty nice house for that monthly payment. Is driving a fancy car really worth that expense?

Those who save a lot for retirement often buy their cars used. Cars that are three to eight years old are often in the sweet spot, having depreciated enough that future depreciation won’t be too bad, but still new enough that repairs aren’t likely. Even if you do have to repair your car on a regular basis, if you keep the car for a decade or more and perform regular preventive maintenance, your monthly cost of ownership can get down to $200 or less. Just think of how you could invest all that money you’d be saving.

3. Medical Expenses

Medical expenses are a bit of a wild card, and in some cases you have to get lucky in playing the genetic lottery. If you’re unfortunate enough to suffer from a rare genetic disorder, or develop an aggressive form of cancer, you’re going to be paying a lot of money in healthcare expenses. And you’ll want to make sure that you have a good health insurance plan so that you’re minimizing your out of pocket costs.

If you’re in good health, however, you can take steps to maintain that good health. Regular exercise and a healthy diet can go a long way towards preventing the development of diabetes, hypertension, and a whole host of other health conditions. An ounce of prevention is worth a pound of cure, and can help minimize your future healthcare expenses.

By minimizing your expenses, even those making average money can find enough to save for retirement. Then it’s just a question of making the right investments. A well-diversified investment portfolio, protected with investments in gold and precious metals, will stand most investors in good stead.

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