I’ve some distant relatives, Bob and Carol*, both in their fifties. Carol inherited a bunch of antique furniture when her Mom died. But they had a problem. They had no place to put the furniture but wanted to keep it in case their daughter wanted it “someday”. Plus they had other stuff they wanted to keep but no longer fit in their house.
So they did what a lot of couples do and rented a fancy-pants, climate-controlled, storage locker for about $100 per month. You probably have friends that do the same thing, right?
But guess what this annual $1,200 expense is really costing if they keep the locker indefinitely? A whole lot more than you think!
You might’ve heard of the 4% withdrawal rule. This is the safe annual withdrawal rate of your savings during retirement so you don’t run out of money before you die.** For example, if you’ve got a $1,000,000, you can afford to spend $40,000 or 4% per year without running out of money in retirement.
There’s a lesser known corollary rule called the Rule of 25 which is just the inverse (1/.04) of the 4% rule. This is the multiple of the amount of money you need to support an annual expense in retirement. Say what? In other words you take any annual expense and multiply by 25 and that’s how much extra retirement savings you need to support that expense. So that $1,200 storage locker that Bob and Carol have? It requires an extra $30,000 in retirement savings! How long do you think it takes Bob and Carol to save an extra $30,000 for retirement? One year…two years…three?
It gets worse. If Bob and Carol instead downsized their stuff by selling their furniture and investing the proceeds, they could earn a return instead of having an expense. I’ve no idea what their antique furniture is worth, but I’ll just guess $3,000. Suppose they want to retire in 10 years. If they sell the furniture today and get rid of the storage locker, then in 10 years they’ll have $3,000 plus interest. If they keep the storage locker forever, then after 10 years they’ll have spent $12,000 PLUS they need to save an additional $30,000 to cover the expense during retirement. That’s a total of $52,000 spent for a extravagant storage locker on top of a loss of $3,000 plus interest. A total of $55,000 plus. Ouch!
Look, I get that Carol probably feels sentimental about her Mom’s old furniture. And it’s easy for Carol to say to herself “It’s just $100 per month. Not a bad deal for saving memories.” And honestly, lots of people use similar logic to justify relatively small monthly expenses.
But the numbers don’t lie. Even relatively small monthly recurring expenses can murder long-term net worth and seriously postpone retirement for more Wage Slavery. It’s just hard to see because it’s like death by a thousand cuts. Take a look at this table to see just how bad it is:
|Monthly Expense||Annual Total||Retirement Savings Needed|
Bob and Carol are smart, practical people that live fairly frugal lives. I’m convinced if they understood the true long-term cost, they’d race over to their money-pit locker, sell or donate their stuff, and cancel the lease. I know I would!
Besides, most adult children don’t want their parents old stuff anyway. Not only that – the adult children end up having to deal with getting rid of all that stuff when their parents become decrepit or die. It’s not fun.
Thanks for reading! Do you know people like Bob and Carol? Any suggestions on how to broach the subject with them without sounding like a jerk?
* Not their real names.
** Some experts believe the 4% rule is too high. Maybe it’s really the 3.5% or 3% rule now. It doesn’t matter to the general point I’m making because the lower percentage would make the numbers even worse. A 3% rule would be the shocking Rule of 33!