Personal Finance

How To Spend $10K Less A Year, Shifting It To Your Retirement Funds

Shutterstock photo

Financial advisor Chris McMahon accompanied a client to a Mercedes-Benz dealership. Two beautiful, similar S550 sedans caught their eyes. But before his client could look at the price stickers, McMahon told him to sit in each and check out their features, then guess which was the new vehicle priced at $110,000, and which was the used car with 32,000 miles under the hood, toting a sticker price of $62,000.

McMahon's client bet the new, more expensive car was the one with an unlimited mileage warranty. The other was covered for 75,000 miles. It was a good bet. But wrong.

"The five-year savings on buying and operating the car was a lot. It was $50,000, including about $10,000 for repair and upkeep on the new car after the warranty would expire," said McMahon, who is a registered investment advisor in Pittsburgh. "And I told him he could plow that into his retirement savings ."

And that's the sort of big-bucks savings that more people need to boost their retirement nest eggs . In a new survey by BMO Harris Financial Advisors, 75% of retirees said they wish they had saved more. No surprise there. The challenge is how do you come up with enough money to make a difference?

In addition to McMahon's suggestion that consumers look for a used car instead of a new car from manufacturers that provide well-made vehicles and worthwhile warranties, here are three more tips for saving more than $10,000 each a year:

  • Youth sports: scaling back. "I've spoken with several families that let youth sports consume up to 30% of their total household budget," McMahon said. "By scaling back, I've helped families save $25,000 to $40,000 a year."

Many organized youth leagues charge a participation fee of $10,000 to $12,000 a year. On top of that, families spend on out-of-town travel to games and tournaments, private lessons and general fitness.

"I had clients who spent $90,000 a year for one child in a soccer league," McMahon said. "Part of the rationale was that the family wanted their child to earn a college scholarship. But I'm sorry, that's a gamble, not an investment."

The family paid $31,000 for travel to a tournament in Europe, $15,000 on private lessons, $12,000 on general fitness instruction, $7,000 for a videographer to put videos into materials sent to college recruiters. "They spent another $4,000 for a person to market the kid to colleges in hopes he would play Division I soccer."

McMahon added, "I advised them to cut that spending and plow the difference into retirement savings."

Taking that remedial action was essential. The parents' cash flow was fine. The two surgeons earned a combined $650,000 annually. But they were socking away only 8% of that each year into retirement accounts. The parents risked an 80% chance of outliving their nest eggs in retirement.

"The parents are each 50 and plan to retire in 15 years," McMahon said. "By cutting youth sports spending by $50,000 a year and putting that into a deferred compensation retirement account, the odds of their savings lasting long enough in retirement soared to 88%."

More Sports Savings

Another family was spending $24,000 a year for private tennis lessons for their two children. "They were hoping the kids could improve enough to win tennis scholarships to college," McMahon said.

When they investigated further at McMahon's urging, the family found that the same instructor offered group lessons at the same indoor winter facility. The kids switched and mom signed up too. They ended up as the only students in the group. And their total yearly cost fell to $6,000.

"Instead of mom sitting in the car, she got lessons too," McMahon said. "Nothing else changed, except their total cost plunged."

With a stay-at-home mom and an internal-medicine physician father, household income was $200,000. Now at age 42, Dr. Dad planned to retire in 23 years. Acting on McMahon's fiscal diagnosis, the good doctor funneled 80% of the sports cost savings into a taxable brokerage account, some of which is earmarked for retirement. "Now he's on target for building retirement savings big enough," McMahon said.

  • Golf, tennis or country club: downgrading membership. Junior's recreation isn't the only household activity whose cost can be trimmed, plowing the difference into retirement savings. Downgrading your membership level at a golf, tennis or country club can save you tens of thousands of dollars a year.

McMahon has a client who loves to play golf, sometimes with his own clients. His yearly full membership dues at a club were $40,000. "I pointed out to him that he would save $18,000 a year by switching to a social membership," McMahon said. "He'd be entitled to golf more often than he usually did. He could still bring guests. And he would save more by not having to pay an additional assessment for club improvements. The only downside was that he was switched to a smaller locker, which he laughed off."

  • College courses: auditing. If you don't need the credits or a degree, consider auditing classes that you take only for fun. Savings can range into the tens of thousands of dollars.

"One client was taking courses at a university in Pittsburgh," McMahon said. "It turned out she did not need them for work or professional advancement. They were simply for personal enrichment. Each course she audited cost about $1,000 instead of the $25,000 a year she had spent for full credit."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics