More often than not, retirement advice focuses on some variation of needing to save and invest a percentage of your income on an ongoing basis. What if you were told to throw those “target savings rates” out the window? Stay with us on this …

At Sequoia we define financial independence as "the ability to earn an income from your investment accounts and other retirement resources sufficient to maintain your current standard of living throughout your life.” Given this definition, it’s reasonable to ask, “How is savings not the primary driver of achieving financial independence?” The answer: it is, and it isn’t.

In a perfect world, households spend less than they earn, which in turn allows the household to save and invest the difference. It’s not the savings rate that drives financial independence; it’s actually the spending rate.

By framing retirement advice in the context of a household’s spending rate, spending and income are positioned as the primary factors driving financial independence. The lower the spending rate, the higher the likelihood of success.

There are only two ways to improve household spending rate: spend less or earn more.

When it comes to reducing expenses, it’s helpful to place spending habits in context. In April 2018 the Bureau of Labor Statistics (BLS) released its 2016 Consumer Expenditure Survey, which looks at the median spending by category for U.S. households.

The two areas where people may have the greatest ability to reduce their expenses are housing and transportation, which make up approximately 33% and 16% of median household expenditures, respectively. Armed with this information consumers should consider what the long-term effect of purchasing the largest home or the nicest car might be.

According to the BLS survey, discretionary expenses (restaurants, entertainment, apparel, etc.) make up less than 20% of household spending. When comparing this to housing and transportation costs, which together make up nearly 50% of household spending, it becomes clear that nickel-and-diming the small stuff won’t make up for overspending on the big stuff. The ubiquitous recommendations to cut back on Starbucks lattes may help lower your healthcare expenses, but it’s unlikely to make or break your financial independence.

Situations where essential expenses make up a high percentage of household income present a unique challenge. A two-bedroom apartment in San Francisco currently rents for approximately $4,650, while the median household income over the previous 12 months in San Francisco was approximately $9,200/month. When housing costs make up 50% of a household’s gross income, reducing expenses enough to move the needle may be impossible. When you consider the fact that real estate inflation has far outstripped income growth, it becomes clear that spending less is not always the answer.

When cutting expenses won’t work, earning more by retraining for a new career, pushing for a promotion or starting a side-hustle (Uber started in San Francisco) may prove to be the most viable option for reducing the household spending rate.

In the end, savings is critical to your ability to achieve financial independence. However, it’s important to recognize that the ability to save is predicated on your decision and ability to spend less than you make. By setting reasonable spending guidelines you not only increase the amount you’re able to save, but you also reduce the amount needed to fund a more modest retirement lifestyle.


Contact Michael Baker to learn more about this topic.
330.255.4326 |


This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product.  The opinions expressed do not necessarily reflect those of author and are subject to change without notice.  Diversification cannot assure profit or guarantee against loss. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Sequoia Financial Advisors, LLC makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third-parties. Certain assumptions may have been made by these sources in compiling such information, and changes to assumptions may have material impact on the information presented in these materials.  Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.


The views expressed represent the opinion of Sequoia Financial Group. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Sequoia believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sequoia’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. Past performance is not an indication of future results. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

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Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.

Wealth Planning Update: Don’t Save More… Spend Less | Sequoia Financial Group


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