Expat readers have asked me to write about retirement for a while but I’ve hesitated because it can be such a complex subject especially for those living abroad. Whether you can afford to retire depends on what savings and investments you already have, when you want to retire, where you want to retire and, mostly, how badly you want it!
However, a blog I discovered recently has really honed my thinking and made me realize that actually getting to retirement can be quite simple.
If you really want to retire as soon as possible (and not everyone does) then it will mostly come down to two things:
- How much you earn (from your salary as well as your investments)
- And how little you are happy to live on (both now and in retirement)
The blog I discovered was written by a guy in the US, ”Mr. Money Moustache”, who retired at the age of 30 along with his wife and baby son. Frankly, he was able to achieve this incredible feat because he had the magic combination of quite high earnings (he worked in IT) and very low spending habits (he only spent around 25% of his earnings).
He was also very sensible with his investments but he didn’t do anything particularly radical.
Can you afford to retire?
So how do you know if you can afford to retire within 10 years like our hero Mr. MM did? First, you simply have to work out how much you spend every month on living costs e.g. mortgage/rent, food, transport, utility bills, education etc. Multiply it by 12 to give yourself an annual figure and that’s your annual cost of living.
In the case of Mr. MM, his whole family lives on just 2,000 dollars per month. I know my family spends more than this but it’s mostly due to our mortgage. Mr. MM only calculates the amount of interest he pays on his mortgage as an ‘expense,’ the rest of the money is paying down the loan so it’s considered savings. Your bank should be able to tell you how much you are spending on just interest each month.
Once you have your annual figure (Mr. MM’s is $24,000) you multiply it by 25 (up this to 30 if you want to be conservative). This means a family, which can live happily (and I really mean “happily”) on 24k per year can afford to retire when they have a pot of $600,000 in savings. Most financial advisors would tell you that you need at least a million but they don’t know anything about your lifestyle.
This doesn’t necessarily mean that you have to have your mortgage paid off as many of us would assume. Mr. MM still had a small mortgage when he went into retirement but he was able to cover that within his 24k/year living expenses.
How should you invest your future retirement money?
An important point here to remember is that your savings/investment pot has to work hard. You have to make sure that you’re achieving an investment return on your savings of at least 5% per year AFTER taking into account inflation (about 7% before inflation). So there is no point saving up a big pot of half a million or even a million and then plopping it in a bank account earning 0.75%. That won’t even match inflation.
Mr. MM’s investments were mostly made up of one or two investment properties (mostly former homes that he moved out of and then rented out) and investments in the US stock market via very cheap tracker funds (also known as ETFs).
These funds don’t require you to be an expert stock picker but they do allow you to access the stock market in a low-cost, simple and diversified way. Fortunately, these types of funds are growing in popularity and very easy to get hold of in France these days too! If you are looking for a European comparison to say the Vanguard S&P 500 tracker, I would buy a EUROSTOXX 500 tracker from your friendly online discounted stockbroker or an online bank like ING or Fortuneo.
Quality of life after retirement
Working out the above calculation will probably bring up some deep questions for you. Would you be happier living a more frugal lifestyle if it meant you could spend more time with your family and escape a job you hate? Or do certain luxuries mean more to you than extra time?
In Mr. MM’s case, he says his quality of life is much higher now and he still makes room for certain luxuries like gourmet food, travel and having a beautiful home (he does many of the renovations himself).
I discussed this topic with my husband’s 75-year-old auntie recently. She wants to sell her house in the suburbs and move closer to the city to be near her kids now that her husband has passed away, but a small flat in Paris costs the same amount as her entire house! She told me her monthly income on her pension is 1500 € – that’s 18k per year.
After doing the calculation myself, I realized that if we sold off a few assets (and if my husband radically altered his spending habits), my family could also afford to retire. But I’m not sure I want to. I quite enjoy my work and working in France comes with lots of perks that I’m not sure I’m prepared to give up yet (not least of which is a LOT more holidays than you get in the US).
It’s obviously a personal decision but I certainly recommend doing the calculation yourself, discussing it with your loved ones and then figuring out exactly when you would like to retire and what you are prepared to do to get there. That dream of retirement that now seems elusive could be a lot closer than you thought.
To get you in the retirement mood
If you want to learn more about Mr. Money Moustache, check out his WEBSITE.
I also recommend this post, which has a table showing exactly how many years away retirement is for you based on what percentage of your salary you’re able to save.
If you want to find out how much you’ll get from French social security in retirement, try this link to consult your recorded history of payment into the French pension system. (You may be surprised at how well-documented your work history is.)
Finally, I should mention, if you downsize your house you can release a lot of money for your retirement. After all, are you really going to need a big house in retirement? A smaller house also means lower council tax and utility bills plus it’s easier to keep clean. If you’re no longer working you can also move somewhere further out of town (like the beach!!), which is cheaper. But many retirees these days hesitate to do that because they want to be close to family or medical facilities. There could also be increased transport costs if you move further out. Not working can make some people feel lonely and isolated so it’s important to think through it all.