Maybe because I’m one of the older business geeks at FOX, many ask me for financial advice. I usually avoid the “one hot stock you got to own” questions. But I’m more than happy to discuss themes, and among the more popular, if not troubling, issues for many these days is saving for retirement. Folks young and old worry about it. And they worry a lot about it.
Invariably they want to know how much they should save. I always answer the same way – “as much as you think you’ll need.” It’s a vague answer but it’s meant to be. The fact is retirement is about lifestyle. It’s about the lifestyle you want to maintain, and the things you maybe can start doing without. Therein lies the great retirement conundrum, because for me, it’s not about how much you save, it’s even more about how much you plan to spend. People forget the latter when they focus on the former. I think financial planners do their customers a huge disservice if they forget this simple math concept – money in, money out (for viewers familiar with my shows, this is an all too familiar theme).
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When I ask those who ask me what they want in retirement, most answer that they just want to live comfortably and securely. I usually follow up and inquire what defines “comfortably and securely.” Many younger people, in particular, figure that if they save a million bucks, they’re set. For someone in his or her mid-20s earning $25,000 now, that certainly seems like a lot of money. And true enough, a million bucks would cover a lot for someone used to earning $25,000. Assuming annual 4% withdrawals in retirement, that’s still $40,000 a year, which along with Social Security (knock on wood) should provide some cushion…that is, if life were static. Here’s the thing – it’s not.
And this is when I invariably sound like a wet blanket. That young person won’t always be earning $25,000. Over the course of his or her career, there will be raises, and promotions, and simple cost of living adjustments which will boost that pay considerably over the course of a working lifetime. It’s not uncommon for many young people to be looking at six-figure end-of-career incomes. And Americans tend to live up to whatever they’re making, if not exceed what they’re making. They get used to that income, and the lifestyle that comes with that income. So by the time they retire, do they have enough to maintain that lifestyle?
Many don’t, because they haven’t figured in the costs of that lifestyle – what they spend and where they spend it. That’s why the multi-millionaire who proudly boasts he’s saved a couple of million bucks for retirement forgets he’s spending like a multi-millionaire now. Two million smackers to him isn’t quite like two million smackers to the $25,000 worker who eventually makes it to a $100,000 worker.
A popular rule of thumb is to plan on needing 70% of what you’re making now in retirement. That means if you’re making $100,000 a year now, factor in $70,000 a year in your golden years. Now factor in how many years you’re going to be around. Obviously, that’s a tough one, but it’s not at all unusual to see Americans living well into their 90s and even past 100 these days. Let’s just say you make it to 85, and you retire at 65, and again, I’m being very conservative here. Now, you do the math – 20 years times, in this case, $70,000. That’s $1.4 million. And that’s just for 20 years. Let’s say you need 30 years’ worth of dough – try $2.1 million.
The numbers are sobering, and for many, depressing. But I always tell folks not to fret too much. Remember, I remind them, this is money in and money out. Maybe you don’t need the same lifestyle in retirement that you enjoyed when you were working. Maybe you don’t need as many cars, or as many nice cars. Maybe you need only one car. Maybe you don’t need to stick around in a high-tax state. Maybe you can seek out a lower tax state. Maybe you don’t need to travel as much abroad. Maybe you can satisfy your curiosity driving around here.
I know these are simplistic points, but they’re meant to make this simple point: retirement is really about numbers that support the life you want to live, and the sacrifices you might – or might not – want to make. There’s no doubt that once folks retire, they automatically start saving on commuting costs, and on job-related costs, such as clothing and other expenses. That’s not to say we still don’t provide for ourselves, we just don’t need as much for ourselves.
But again, all this is a personal choice. And all this requires a detailed accounting of what we’re spending our money on now. You’ll be surprised how few people keep track of this stuff. Once they do, it’s almost always an eye-opener. They quickly see redundancies and overlaps they can easily remove or adjust – cutting costs is invariably easier than you think (or certainly easier than Washington says).
For younger people, age is a huge advantage. The younger investor has the benefit of time and power of compounding savings. Older people have less time, so less time to benefit from the miracle of this compounding. But my point is that any time is better than devoting NO time to this, so get cracking on this. Think about the lifestyle you have now, and whether you can even afford it now, presumably at full pay. If this is the way you want to live in retirement, do you have the dough to do it at half or 70% of that pay?
It’s hard-choice time, and I don’t care how old or young you are. There’s no time like the present to take account of your spending priorities – the things that really matter and the things that really don’t. You pick. You choose. But then step back and decide what’s really worth the extra dough. That’s why I say the millionaire with two million bucks in the bank and thinks he’s set is a lot worse off than the $25,000 or even $50,000 guy with a half that in the bank, and fears he isn’t. It’s about what you’re used to, not about where you’re headed to.
Much of this is simple and obvious. It should be. Because this isn’t rocket science. Remember, it’s just money in and money out. It’s just what’s important to you versus what’s not important to you. Get back to the core things that matter to you now. I suspect few, if any, have to do much with “things” now. We all love our goodies in life. But they alone don’t define a good life. Some of our most priceless investments are the family and friends we often forget in our calculations. I always tell people that makes the math less daunting, because then retirement becomes a simpler act of … prioritizing.