The Key To Retirement Investing: Live Frugally, Live Well

In response to my most recent article, Stop Telling Retirement Investors They Need A Million Dollars, several Seeking Alpha readers agreed – with a caveat.

They said, no you don’t need a million dollars to retire. You just have to keep your expenses low. With that, I concur. However, a few took the argument a step further.

They brought location into the mix, effectively arguing that you can’t possibly keep expenses low in large metropolitan areas. I disagree.

Others disagreed completely with my suggestion to focus on income rather than amassing the retirement industry’s magic number of $1 million (or more). That view of the landscape went something like this:

  1. Investors need a goal, something to shoot for. And becoming a millionaire represents a milestone large numbers of Americans can relate to.
  2. You’ll probably need more than a million dollars, particularly if you have responsibilities and obligations and you want to have a life.

Because where you decide to live and how you choose to situate yourself in that place links inextricably with your saving and investing strategies, I take both themes together in this article.

The Wiltern, Los AngelesThe legendary Wiltern, about a 20-minute walk from my Los Angeles apartment / Source: Author

You Control Your Cost Of Living

I have lived in California’s most expensive cities – San Francisco and, presently, Los Angeles. At some point next year, I plan to move to Oregon’s priciest place – Portland.

I’m not leaving Los Angeles because I don’t like it. I’m leaving because I like Portland better.

I’m not leaving Los Angeles because I can’t afford it. I’m leaving because I can upgrade the quality of life components that matter most to me in Portland.

I have broad experience with cities. In addition to living in the costliest, I have lived in less expensive areas, from Pittsburgh to Dallas to Las Vegas.

With the exception of Manhattan and San Francisco, I argue you can live pretty much anywhere you’d like and have a great life, as long as you’re willing to make sacrifices. These sacrifices prove crucial to not only being able to live where you want to live, but to crafting and implementing successful saving and investing strategies.

Los Angeles SunsetThat’s a recent sunset steps from my apartment in an area within East Hollywood called Melrose Hill.

Like so much of Los Angeles, East Hollywood is economically and ethnically diverse. Classic California Craftsman homes line the street you see above. They go for well over a million bucks each.

I live in a studio apartment that rents for about $1,350 a month.

In my neighborhood, you can walk 10 minutes and spend north of $100 on one of the better Italian meals you’ll have in your life (at Osteria la Buca). On the way you’ll not only pass gorgeous Craftsman houses, you’ll see homeless people and, increasingly, gang signs tagged on building walls. That’s LA.

I can afford to live in a neighborhood with less blight and better walkability, but I choose not to. It would cost me upwards of $2,000 monthly for an equivalent apartment in, say, West Hollywood. If I went Downtown, I’m in for, at a minimum, $2,500. If I went back to Santa Monica – where I used to live – same thing.

So I choose to live where I live because it saves me around $1,000 a month. That’s $1,000 I can direct elsewhere.

When I move to Portland, I can live in one of the city’s “best” neighborhoods, pay what I pay in Los Angeles, and have a recently built, slightly larger apartment. I will be able to walk to countless bars, restaurants, and coffee shops minus the aforementioned blight.

I could pay Los Angeles prices in Portland to live in the most posh enclaves and/or have a much larger apartment, but I choose not to. Because, again, I want that additional $1,000 a month to spend, save, and invest elsewhere.

The counterargument to all of that tends to be, sure you can live that lifestyle when you’re single, without kids.


I lived it. Married, with a kid. In both Santa Monica and San Francisco.

We spent about 75 percent more on rent. But, as a couple, we made more than double what I make now (my ex-wife, and now great friend, makes bank!). Our San Francisco neighborhood was more like the one I live in now in East Hollywood. Santa Monica – well, it’s a series of pretty high-tone neighborhoods.

Bottom line – if you want to live in large urban areas, you can. You just have to live within your means. To live within your means, that means making sacrifices. That means, for example, not buying into the American dream of home ownership.

But that’s a moot point because, according to Essex Property Trust (ESS), “Chronic housing shortage and tax law changes have pushed the cost to own a median priced home to 74% above the average cost to rent in Essex metros.” That’s San Francisco, Southern California, and Seattle.

I live well. And I’m frugal. That provides me flexibility to live, save, and invest. I’d rather have flexibility than a mortgage payment, the attendant costs of home ownership (particularly in such expensive markets), and other markers of the American dream.

Portland, OregonI’ll probably live in a neighborhood that looks something like that when I move to Portland. By the time I get there – mid-to-late next year – I will have no car payment, no debt, and very few absolutely obligatory expenses outside of rent.

It’s All About Flexibility And Working Backwards Strategically

The budget I laid out provides flexibility, in the form of a considerable amount of monthly discretionary income. I put myself in that situation because of the choices I make. I referred to them as sacrifices. Some might see my choices as sacrifices, but I actually do not.

I like living what we commonly refer to as an urban lifestyle. The flexibility I give myself in lieu of other material things allows me to plan short and long term not only for myself, but my daughter. She has exponentially more money saved than I could have even dreamed of at her age.

I hope she’ll use whatever flexibility I have helped provide her to divvy up her finances the way I do. Which drives us back into the whole idea of $1 million.

As I noted in a comment on the article that started this conversation, it’s not an either/or proposition.

Following a dividend growth investing (DGI) approach, you might very well end up with a million dollars or more. I’m not opposed to amassing seven figures. That would be absurd. It’s more about focus.

I think the focus ought to be on how much income you require to live how you want to live, before and during retirement. If you teach new investors to simply strive for a million I think you’re doing them a disservice. I think you might be setting them up to fail.

The crowd that focuses on the $1 million marker also tends to preach “paying yourself first.” This is the idea that you save/invest a certain amount before you do anything else, such as pay rent, buy food, service your bills, or go to dinner. Sounds great in theory, but not everyone has the luxury to follow this tenet. And, even if you do, I’m not so sure you should.

I work backwards.

As I noted in my last article (link in the first paragraph of this one), I take regular looks at where my monthly expenses sit. Then I direct income to my subsistence fund, which is designed to cover two months’ worth of expenses.

From there, with my emergency fund where it needs to be, I direct income to any other savings funds I have going at the moment. You might have one for travel or a new car. I have one for my eventual move to Portland.

Then, I invest the money I have left over. If things were tight (and I had paid myself first), I would run the risk of having to liquidate part of my portfolio to cover a budget shortfall. This is something we don’t talk about much. But I think it happens a lot to a wide range of people, in particular, millennials who have bitten off more than they can chew lifestyle-wise.

At day’s end, no matter how you structure your budget, you need some discipline. You need discipline to come out ahead the way I do it. You need discipline to come out ahead if you’re part of the prevailing “pay yourself first” crowd. I simply prefer my way. It works for me. I think it’s better.

Working DGI Into The Mix

I’m in the process of applying similar thinking to my DGI stocks.

There’s no doubt I’m making assumptions and predictions out into the future, in terms of both what my expenses will be and how dividends will grow. But that’s no different than taking any other approach. There’s always guesswork involved.

I’d rather focus on the relative safety of a dividend than the price of a stock anyhow. If you’re investing in dividend aristocrats and contenders, you can worry a little (maybe a lot) less about stock price.

I like to look at individual or groups of positions and estimate the income these stocks will generate when I might need to rely on that income more (or entirely) to meet my expenses.

Here’s an example.

Let’s say that today, I own 1,000 shares of AT&T (T). To keep things even, we’ll call my cost basis $29.50 for a value of $29,500. At AT&T’s present annual dividend of $2.08, the position generates $2,080 in yearly income.

Now let’s input some numbers into my handy dividend calculator, using Seeking Alpha data on T, to see how the income that position throws off can grow.

Here are the assumptions I made, starting with the position detailed above:

  • Additional monthly buys of AT&T stock of $250.
  • Annual dividend growth of 2%.
  • I reinvest all dividends.
  • I do this for the next 17 years (until I’m 62).
  • AT&T’s stock price stays the same.

By the beginning of the seventeenth year, my position in AT&T would have grown to 6,940 shares, valued just north of $200,000, generating annual income of $19,673, which works out to $1,639 a month.

There might be a rounding error present, but that’s pretty much how things would look making the most conservative assumptions, such as a wholly stagnant stock price for 17 years.

Again, back of the envelope, let’s say that income could, if I need it to, cover my rent.

Taking the focus off of income, the position value of more than $200,000 in T alone provides an additional source of income if, for some reason, I really needed it. That said, the goal will be to leave the principal alone and use the income to meet expenses. Alas, one day dividend income replaces employment/work income.

That’s from one investment. If I’m investing, as little or as much as $1,000 or $2,000 a month into a DGI portfolio, I think I’ll be in better than good shape for three reasons:

  • Solid income generation
  • Presumably a high six-figure, if not seven-figure portfolio
  • Low cost of living

I have lots more to say on this and related subject matter. I’m sure you do too. That’s what the comments are for. If you’d like Seeking Alpha to notify you about my future articles, please follow me at the link or at the top of the page.

Disclosure: I am/we are long T, ESS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article was originally published on Seeking Alpha

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