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Friday, May 21, 2010

The "Simple Living" $90 budget (or less!)

Last post I described some ways of controlling and leveling living expenses in retirement. I reviewed Paul Terhorst's ideas about simplifying your life, cutting fixed costs, and maximizing your fun. When his book, "Cashing in on the American Dream" was written, he recommended that early-retirees live on what is now $90 a day ($50 in the late 1980s). Given that low figure, how realistic is this?

Well, let's consider a single, 44-year old retired E-7 living in Reno, NV. He just retired after 24-years of service. According to the DFAS calculator, his benefit is about $80 per day. During his career, TSgt (USAF-Retired) Jones saved $100 each month in a taxable investment account. This account is worth about $60,000 today (at an 6% rate of return.) He also saved 15% of his pre-tax pay in his TSP account beginning in 2002. That account is valued at $60,000. TSgt Jones owns his 2004 car outright, and does not maintain a credit card balance.

On the advice of a financial planner, TSgt Jones calculates that he can take a 4% distribution from his investments each year for life, or $4,800 per year/$400 per month.

So here's the summary:

Liquid Net Worth: $120,000
Monthly Retirement Pay: $2,425
Investment Income: $400
Gross Income: $2,825
Taxes: $300
Net Income after taxes: $2,525 or $84 per day

So, what chance does TSgt Jones have to live well in Reno on $84 per day? I used Dave Ramsey's Zero-Based budget to estimate how he might spend his money. The quick budget breaks down like this:

Charity: $250
Savings: $150
Housing: $800
Utilities: $200
Food: $200
Transportation: $ 250
Clothing: $100
Medical/Health: $125
Personal: $200
Recreation: $250

Now, does this make sense for Reno? Let's start with housing. Is $800 reasonable for a single person to pay for housing? TSgt Jones decides to use his VA home loan to purchase a 2 bedroom townhouse. Using the Yahoo! Finance comprehensive mortgage calculator, he discovers that he can spend $100,000 for his home. He searched Realtor.com to find a 2 bedroom, 2 bathroom home for less than $100,000. He finds more than 150 properties to choose from, and picks a 6-year old end unit with a garage for $80,000. He asks the seller to pay the closing costs, and the offer is accepted! His payment for that house is $778 per month on a 15-year mortgage.

As for the other expenses, TSgt Jones is saving his transportation budget (after paying fuel and insurance costs) for the purchase of a replacement vehicle when the time comes. He does his grocery shopping thoughtfully, using a good list and limiting his prepared food purchases. He eats in restaurant's only periodically, spending his time hunting, fishing, traveling, and volunteering in his community.

Possible? YES! Easy? Maybe. Someone with a larger family, childcare expenses, or other financial responsibilities will have to plan more carefully before retiring completely on their military retirement.

If you are a military retiree who either lives on their retirement or who disagrees with my example, please comment. I'd love to learn more about your experience.

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