How much money do you spend each year on ice cream? Seems like a strange question, I know. But the purpose of it is to get you to start thinking in terms of annualized expenses. This is the first step towards putting together a budget in early retirement.
First, you must determine how much you spend now on all household expenses. Some of these categories will likely go away or be reduced significantly in retirement (i.e. commuting costs, eating out, etc.), but for now list everything you spend money on each month and multiply by 12. A quick look at my own budget might go something like this (with monthly amounts listed first, and the annual costs listed second):
Grand’s Family Budget (Sample):
- Mortgage: $1,200 ($14,400)
- Food: $500 ($6,000)
- Electricity: $200 ($2,400)
- Cell Phones: $100 ($1,200)
- Car Insurance: $60 ($720)
- Cable: $45 ($540)
- Netflix: $15 ($180)
- Ice Cream: $10 ($120)
My family likes ice cream, and we can easily go through a half gallon a week at roughly $2.50. That means we spend $120 a year on ice cream. Yikes! If you carry out this exercise further and apply the “multiply by 25” rule we would need a $3,000 nest egg to pay for ice cream for the rest of our lives. Toss in our Netflix membership and we would need about $7,500 to generate enough interest to pay for our weekly ice cream/movie nights.
I did not provide an exhaustive list of our monthly budget, but you get the idea. Ice cream was a very small example budget category, so just imagine how much savings would be required to generate the interest to cover your utilities and your food bill? In case you are wondering, about $60,000 and $125,000, respectively.
This exercise reinforces to main ideas. First, it’s important to whittle down as much debt as possible, and live as frugally as possible when planning for an early retirement. The larger your budget categories are the larger the nest egg you need to save to generate the interest to pay for those things. This is assuming you do not want to scramble the golden egg by drawing down the balance during retirement.
My homework assignment: Create a full, annual budget of our regular, monthly expenses. Apply the “multiply by 25″ rule to establish a ballpark figure of the nest egg I would need to save to live off the interest indefinitely. This figure will represent the top end of my “number.” Over time I will bring that number down by reducing expenses and determining a safe withdrawal rate.
Photo by lilvanili
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Sounds like a great plan. It’s hard to plot a course to follow if you haven’t learned how to figure out where you want to end up in life. Be sure to let us know your ‘high-ball’ estimate, and the progress you make in saving upt that amount.