Sanjib Saha
24 November 2022
Each dollar we misspend in our working years is a raid on our retirement bank.
Sounds dramatic? I guess so. But it’s true, nonetheless. We just don’t think of it that way. Why?
Because we aren’t that good in thinking long-term and picturing ourselves in our inevitable life-stage called retirement. “It’s many years from now, and we’ll cross the bridge when we get there.” This shortsightedness, alas, can be costly if we aren’t saving a good chunk of our income towards retirement.
Realistically, most of us are going to earn only a limited amount of money in our lifetime, and there will be a time when we won’t have the energy, ability, or willingness left to work for a paycheck. Without a steady income, what’d bring food to the table and pay the bills? Social security may cover a bit. A few of us may even be lucky to have the security of a pension from work. Beyond that, we are on our own. Whether or not we can lead a comfortable and dignified life in retirement would depend a lot on how much we stashed in our retirement nest egg.
For our own interest, we shouldn’t let anyone raid our retirement assets. But why do we allow ourselves to raid it indiscriminately in our working years?
Let me just repeat what I started with:
Each dollar we misspend in our working years is a raid on our retirement bank
How? First, there’s the opportunity cost. If we spend a dollar today, we have one less dollar to fund retirement. That dollar would’ve compounded over many years and multiplied. By spending that dollar today, we are subtracting much more than a dollar from what our retirement fund could be.
But that’s not all. What if that dollar we spend isn’t a one-off expense, but a recurring cost that we expect to keep paying even in retirement. Now the problem compounds (no pun intended). We are not only putting less towards our retirement savings, but also increasing our retirement expenses. We’d need a bigger nest egg to maintain our lifestyle in retirement.
Not a big deal? How about a little exercise? Think about an expense you made recently, something that’s discretionary in the sense that you won’t be devastated without it. Perhaps a new streaming subscription that you started last month, or the trendy sports car you couldn’t resist last year, or the Friday night-outs with your drink buddies.
Now take a guess about how much it cost you in terms of your “retirement dollars”. Use the calculator below to see if you got it right.
Are you surprised that the item you paid for costs much more than what you thought you were paying for? If so, you aren’t alone. We don’t take out a financial calculator each time we buy something or sign up for a recurring financial obligation. It’s not easy to estimate how much a seemingly small expense can affect our hope of a comfortable retirement after years of hard work.
To be clear, this is neither to judge our spending habits, nor to say that we must live a stingy life now in order to afford a comfortable retirement. We are entitled to spend without guilt once in a while, as long as we are paying attention to our important financial goals, including looking after our own future. This is more about raising awareness of a few things. First, we’d earn only a limited amount of money in our working years, and the income would eventually stop. Second, a dollar spent on unworthy cause is one less dollar from something that we might care about more. Last, for the most part, we are on the hook to pay for our own retirement. Wasting retirement dollars isn’t likely to end well.
Note: The calculator is based on annual compound-interest formula, using a 4% annual inflation-adjusted investment return until age 65. It also uses the 4% rule for retirement withdrawals. Because these numbers are based on oversimplified assumptions that may not be relevant in real world scenarios, they should be used as illustration only.