How to Juice Up Your Retirement Returns

(Photo Details:  View from last weekend's home exchange to San Francisco)

A penny saved is a penny earned.  Actually, a penny saved is more than a penny earned after taxes are factored in.  Depending on where you live a penny saved could be like two pennies earned.

Anyway, this isn’t really a post about taxes.  Taxes are just the icing.  It’s a post about how to earn more on your investments in retirement.  Remembering that a dollar not spent is another dollar (or two before tax) in your pocket.  Here are just a few ways to get more money in retirement. 

Solar Panels

We just got solar panels on our home.  It’s a big investment, but it’s an investment with a guaranteed return.  How many investments are like that? 

Right now the money sitting in my bank account is earning .11%.  The money sitting in short-term bond funds is earning just a tad more.  Long-term bond funds may wind up earning negative returns depending on when and how quickly interest rates rise over the coming years.  And the stock market is sitting near all-time highs.  Who knows the future direction, but I’m guessing the huge returns we’ve been experiencing over the last few years are not going to continue, at least in the short-term.

So I took the dollars out of my bank account, where my returns were dismal--basically zero--and affixed those bills to the top of my roof.  The electricity that those bills are generating cuts an actual dollar amount off of my monthly electricity bill.  That’s the same as if my bank account generated enough after-tax interest income to pay most of my electricity bill.

Projected out over a 20-year life for the panels, the net amount I’m saving on electricity is equal to a 15% annual “dividend” on my investment.  Oh yeah, and tax-free.

Of course, you don’t have to be retired to take advantage of this tip, but the math works better if you know that you will be living in your house for at least the recoup-your-investment period; in my case that’s eight years.  I’m pretty confident I will be living in my house for the next 20 years.  If you’re still working, you might not be able to make that call as confidently.

(Here's a good article about investing in solar to supplement retirement income.)

Replacing a Fuel-Inefficient Vehicle

Last year we traded in our gas-guzzling car that got about 20 miles per gallon.  I say traded in, but we almost had to pay them to take it off our hands.  It had nearly 200,000 miles on it and was making some noises that I’m sure would have cost a few thousand bucks to fix.  I used the age-old technique of turning up the radio to drown out those noises.  But at some point, I knew that wasn’t going to work anymore.

With our new car, we’re getting double the mileage, slashing our gas budget by half.  That works out to a 4.5% return on our investment.  Lower than the solar panels, but still better than I think I’ll earn on the alternatives, at least in the near term. Again this is a tax-free return, so it’s much better than the alternatives.  And now that we’re generating most of our own electricity, I might consider a hybrid/electric car when we replace the next one.   

Swapping Homes

Two weeks in Australia, two weeks in Montreal, three months in Manhattan, one week in Vermont, four weekends in San Francisco, one weekend in Monterey, and one weekend in Santa Cruz.  Total cost of lodging:  zero.  That’s because we did all of it through home-exchange.

I don’t know how much exactly all that lodging would have cost me if I had to pay for it over the last 5 years, but let’s just say it would have run me about $150 per night to be conservative.  That’s nearly $20,000 I’ve saved on travel expenses over the last five years.  If you remember, when you retire in your 40’s you need about 33 times your projected living expenses to fund your retirement (living expenses that won’t be covered by other income like Social Security.)  Which means I would have needed another couple of hundred grand in my nest egg to cover my travel expenses if I were paying for that lodging. 

For people that want to do a lot of travel in retirement, home-exchange is a great way to do it.  It takes a lot of time to arrange this kind of travel.  But in retirement, you finally have that time.

Airline Miles

While we’re on the subject of travel, we’re joining some friends in Thailand next year to help celebrate their milestone birthdays.  That’s 21 hours of flight time.  We haven’t paid for airline tickets in years, other than for short trips to Vegas or Los Angeles.  That’s because we charge almost every dollar we spend on our credit card that earns miles.  Since we pay the balance in full each month, it only costs us the $65 annual fee for all our big-ticket air travel:  New York, Australia, Montreal—all of it was free.

But on our trip to Australia a couple years ago, we learned that free flight isn’t good enough when you’re talking 21 hours of flight time.  Free business class is what we’re really after.  And we didn’t have enough miles as of last month to do that for Thailand.

So what did we do?  You know all that stuff that comes in the envelope with your mileage summary statements that you usually throw away?  Doug reads it.  All of it.  So we moved money from one brokerage account to another and earned 100,000 miles.  That combined with charging the solar panels put us over the top with miles--free business class both ways.  I’m not going to do the math, but that’s about a gazillion percent return on that $65 investment.

Stuff You Can Do Yourself

Ok, back to the expenses that you need to cover with your nest egg, for me, remember 33 times.  I, like many people, don’t really enjoy cleaning my house.  I like gardening better, but when it’s too hot or too cold I don’t really enjoy that either.  But I do both of these tasks myself anyway.  Because 33 times those expenses would be another couple of hundred grand I would have needed in the kitty at retirement.  Between that and vacation lodging, it really starts to add up, right? 

Or looked at another way I could have continued to hire people to do those jobs, but then I’d have to give up piano lessons and my clothing budget.  Or some of my travel budget.  Or all my going-out-to-dinner budget. 

Dining Points

While we’re on the subject of my going-out-to-dinner budget, I’m probably the only one on the planet that hasn’t used Groupon.  But that’s one great way to save on that line item.  I do, however, use OpenTable to make all possible dining reservations.  The truth is, I hate talking on the phone to make restaurant reservations, I much prefer the Internet.  So, I’d make reservations this way even if it didn’t save me money. 

But after so many reservations, OpenTable sends you money.   Well virtual money anyway.  Money that you can use to pay the bill at any restaurant that’s on OpenTable.  We’ve “earned” several hundred dollars this way.  Getting paid to make reservations the way I want to make reservations anyway?  There’s no way to calculate that return on investment.

Work the Discounts and Rebates

Doug has always been good about sending in the little coupons for rebates and class action lawsuits.  It always seems like it’s not going to be worth the trouble, but since it’s all Doug’s trouble, it’s worth it to me. 

The other thing he’s great at is calling companies to get discounts.  When our alarm company raised our monthly monitoring charge he called them and they reduced it back.  When he sees a charge on the phone bill that he can’t identify, he calls.  How many people even look at all those lines on the phone bill?  Probably you are paying for some service you don’t even want, believe me.  I think they count on the fact that working people are too busy to read those bills, and are definitely too busy to wait on hold for hours to even find out what the charge is.

Just last month, we made $200 per person when United Airlines asked us to switch to an earlier flight to New York.  And remember, that was a free flight to begin with.  Now that means we’ll fly for free to Vegas next month.  All because we could be flexible with our flight plans.

Paying Off the Mortgage

This one was a tough call for me because we had a variable rate mortgage that never got above 4.75% as long as we held it.  When we paid off the mortgage earlier this year the rate was down to 2.875%, which felt like very cheap money to me.  But earning a 2.875% guaranteed return on that investment felt compelling, not because of the 2.875% part but the guaranteed part. 

After watching the market roller coaster of the last several years, guarantee looks especially attractive. 

Related Posts:

            Penny Wise and Pound Foolish (Or Stupid Tax Tricks)

            Retirement and the “B” Word

            See Dick and Jane Retire

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Comments

[Executioner]

Nice work on the solar panels. And well done on paying off the mortgage. That guarantee on the return is far to often overlooked.

[deegee]

Paying off the mortgage in 1998 was a big step toward becoming financially independent. I had a 1-year ARM whose interest rate had been climbing throughout the mid-1990s, up to about 8%. Becoming debt-free greatly lowered my monthly expenses and enbled me to start working part-time a few years later, my next big step to FI.

[Retired Syd]

deegee: Well it certainly is an easy call at 8%! You guaranteed a huge return.

[Retired Syd]

Just a point of clarification since I was asked off-line. That return on solar panels is 15% AFTER I recoup my investment. In other words, over 20 years I'll earn back the entire cost of the panels PLUS another 15%/year.

[dgpcolorado]

Solar panels don't always pay their way. Small systems like mine tend to be less cost-effective. My original panels, installed five years ago, have a nominal payback period of about 33 years. I recently added to the system, to fuel my Nissan LEAF electric car, and the new panels have a payback period of more than fifteen years. And that's not accounting for the time value of money or anything like that. My view is that "people buy less useful toys, do they not?"

Over the past year my tiny 2170 watt array produced 105% of the electricity I used to fuel my EV and to run my household. And that has value to me over and above the ROI. So, forget the green eyeshade stuff, it is fun driving on sunpower and skipping the gas stations!

So far as paying off a low interest mortgage goes, the problem is that the money tied up in the house is very illiquid: you can't easily get to it if you need it (you can forget about a home equity loan if your financial situation gets difficult). Better to have a $100k mortgage and $100k invested in a conservative portfolio than no mortgage and no money. That said, if you have plenty of other resources to draw on, having no mortgage sure makes life simple.

I built my current house after I retired using the proceeds of selling my previous house. I then tried to get a mortgage on it but was denied because my income was too miniscule. Never mind that I would have had enough savings to pay it off several times over.

So, like many other retirees, early and otherwise, I enjoy the simplicity of no mortgage to pay and my housing expenses are quite low. But having that money tied up in my house where I can't get at it in an emergency — save for selling the house — isn't good financial planning IMHO.

[Retired Syd]

dgp: Well nowadays, you can get solar panels without putting anything down. Everything is gravy. But in the long run you don't save as much on your electricity bills. Still, that's a great option for folks that don't know how long they will be in their current homes. A return on zero down--very good indeed!

I agree on the mortgage thing. There was a lot of comfort in having that money in the bank when I first retired (well that and the fact that it was in a CD that made more than my mortgage rate). When the market tumbled, I felt better having that money tied up in a CD rather than in my house.

But don't forget, in a pinch, you could get a reverse mortgage. Just be sure to read the fine print.

[Jacq]

My sister lives in semi-desert country with a lot of sun. They installed solar panels and between the panels fueling their floor heating and wood burning stoves, she hardly has to run the furnace in the winter. Win!

[linda vaughn]

Syd,
This is a terrific post! A penny saved really is two pennies earned, Good for you for reminding readers of this. I'm so glad my husband and I learned this early in our work lives. You've given me some good ideas to apply to my own situation, particularly as it relates to air travel. Thanks again.

[Tom Sightings]

Thanks for the great advice. My mortgage is at 3.75% -- a much higher rate than I can get on my savings, but still much lower than any other loan I can get . . . except maybe on a car, but I already have a car that gets 30 mpg. Now the home exchange ... that's something I've got to look into.

[steel]

I am not so sure that replacing a current vehicle by buying a fuel efficient vehicle is often a cost savings. If you "run the numbers", buying a new vehicle is usually considerably more expensive than repairing and keeping the older vehicle. For example:

You mentioned that the new vehicle gets twice the mileage of the old vehicle (40 mpg vs. 20 mpg). If one drives 1000 miles per month (pretty close to average), at 40 mpg the new vehicle would use 25 gallons of gas per month, and the old vehicle (at 20 mpg) would use 50 gallons of gas per month.

Assuming a gas price of $4.00 per gallon (which is higher than it is where I live...about $3.20 around here), that equates to a fuel cost of $200 per month for the old car, and $100 per month for the new car.

But, even a more "common" new car likely costs around $22,000 to purchase (obviously, many new cars cost much more). If one figures the cost of a 48 month loan at a 6% interest rate, the “car payment” is $540 per month. Sure, one could buy the car outright, but that negates any investment earnings that the $22,000 could generate.

It was mentioned that the old car needed "a few thousand bucks" in repairs. For the sake of discussion, let's say the old car needs $2,000 of repairs every year. Then, the repair bill to keep driving the old car comes to $167 per month ($2,000 divided by 12).

Therefore, in "total", the cost of driving the new car (gas plus car payment) comes to $640 per month ($100 plus $540).

The cost of driving the old car comes to $367 per month ($200 plus $167).

Over four years, the new car costs $13,104 more to drive than the old car. Not to mention the expense of increased insurance premiums to cover a newer, more expensive car. And not to mention the depreciation involved with a new car. With 200,000 miles on it, the old car is pretty much fully depreciated now.

Obviously, my figures could be flawed, and there are other considerations. A new car might have better safety features. It is no fun having to take a car to a repair shop. The new car has that "new car smell"...and there are other intangible benefits to driving a new car.

But, as a friend of mine who is pretty financially adept recently said: "I am going to drive my older car until the wheels fall off, then I am going have the wheels put back on and drive it some more".

But I would like a new car...

[Retired Syd]

Steel: We pretty much drove the car until the wheels fell off (in the case of one repair, almost literally). The last 6 years ownership it was like roulette--sometimes one repair a year sometimes two. Each time we said "it's cheaper than getting a new car." To the tune of $14k in its last 6 years, and escalating each visit. That's pretty close to the cost of a new car, and in only 6 years. Probably we should have pulled the trigger earlier, but it's hard to know until hindsight.

The problem is you don't know how quickly the next repair is going to come down the pike. You think, oh this will last for a few more years now, only to find out you need to sink another couple of grand in 6 months later!

You have to take into consideration the cost of repairs on a particular model--our old one was a fortune to repair. I'm hoping the Toyota will be cheaper to keep alive in it's older years. I that case it would make sense to keep it going even longer.

[retireby40]

Wow, great job! We're trying to be more efficient too. Our utility bill is only about $50/month so it's not worth it at this point to try too hard. Our car gets mid 20s mpg so that could improve a lot. Once we drove this one to the ground, we'll get a more efficient vehicle.
We need to work on the travel rewards too. Once we start traveling again, I'll get more points.

[Fred Doe]

Well syd, sorry I've not replied lately. New computer and all that.(talk about cars wearing out)Solar panels sound nice but after I crunched the numbers it wouldn't pay for us. We use natural gas for a lot of things. Cars? I have one in my near future. Some kind of Subaru station wagon. The Toyota truck is getting old and worn out like myself. Gas mileage was a concern five years ago when I retired but a funny thing happen in those five years I realized I cut my mileage by 60% a year. Because I save "cash" I'll be able to write a check for that new Subaru. We haven't had a mortgage in ten years. To sum up my life style "I live as a poor man with lots of money"