There has been a notable shift in retirement trends over the past 20 years. Generally speaking, people are working longer. Back then, about one in four people expected to retire in their late fifties. Today, that's down to one in 10.
So what has pushed the idea of an early retirement further out of reach? It could be lifestyle inflation, arguably a silent killer in your personal finances. I'll crunch the numbers to show you how damaging it can be.
Then, we will talk about how avoiding it can help put you on the path to an earlier retirement.
Consumerism and apple pie
Have you ever heard the expression that something is as American as apple pie? You can probably apply it to the American consumer. Their spending is the cornerstone of the U.S. economy, and the entire economic system is built around average people spending their paychecks throughout their lives.
American culture seemingly glorifies buying the big house and the nice car -- status symbols to show your neighbors that you've made it. Unfortunately, most people don't have the income to truly enjoy some of life's finer things without sacrificing somewhere else. That means consumers often forgo saving for retirement to enjoy these luxuries.
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The median household income in America is roughly $75,000. The average mortgage payment is $2,823 on a 30-year fixed-rate mortgage. That's an annual expense of $33,846, about half of a couple's take-home pay. Whittle away utilities, child care, and food, and there isn't much left over. Yet people will splurge on new vehicles that carry an average payment of $729 per month.
This is all understandable. Emotions impact spending habits, and I'll be the first to admit how tempting it can be to reward yourself. After all, you work hard to build the life you live. But getting carried away is a one-way financial ticket to working until your late sixties.
The little things add up
Ultimately, you'll have to live below your means to retire early. That could mean driving a used car. For example, the average used car payment is about $200 less monthly than for a new vehicle. That $200 per month invested in the S&P 500, earning a long-term average return of 10% annually, would add $454,000 to your nest egg if done from age 25 to 55. In other words, that new-car smell gets very expensive over the years.
As you can see, a modest sum can still be enough to change your financial trajectory. Think about all the little changes you can make in your spending habits. Go on a nice vacation every year? How about mixing in a staycation and investing the savings now and then? Do $100 jeans feel that much better than a $20 pair?
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Sure, these luxuries are nice to have, but ask a 68-year-old still working whether they would trade these things for getting some years back, and I would wager most would take that exchange.
It's never too late to make a change
Everyone reading this will be at different points in their journey. You might be a younger adult thinking about the decisions you'll make over the coming decades. Or, you might be someone nearing retirement.
Either way, it's never too late to take action for positive changes. If you are young, think carefully about how you spend your money. Time is on your side, meaning you can invest less and get a bigger result because of compounding.
If you're older, analyze your financial situation to see whether you need drastic change. If you're buried in bills with no money left at month's end, it might be time to get rid of that expensive car or downsize your house. You'll need to free up cash in your household to invest and have a shot at retiring earlier.
Either way, you only live once, so don't be afraid to strive for something better, like an earlier retirement. Sometimes, it just takes action and a plan to get the ball rolling. You might be surprised by how much progress you can make once on the right path.
