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There are a few pieces of "common knowledge" about retirement I'd like to modify. They may holding you back from deciding to retire. Or, maybe, they are forcing you to live in a way that isn't really satisfying. Certainly, they are preventing you from believing retirement can be joyful with your resouces.
There are three of this nuggets of wisdom that are not hard and fast truths:
1) You need 75-80% of your preretirement income to live a satisfying lifestyle. Amazingly, even though this has been disproved and discounted for years, you will still find this gem quoted quite regularly. It is very possible to spend 80% of the income you once enjoyed as an employed person. Lots of people do.
Some folks spend even more than they once earned, at least in the first few years of retirement. They want to maximize their healthy years. So they "front-load" their expenses with extra travel and discretionary spending, with plans to cut back when the mind, body, or spirit starts to run low on energy. While this isn't the post to discuss that strategy, I can tell you that it is a legitimate approach to retirement planning, if you have the resources to support such a choice and the discipline to cut back after a period of time.Importantly, you absolutely don't need to plan on spending 80% of your working days' income after you retire. I have been retired for 15 years and am spending approximately 40% of what I once brought home each year. Readers of this blog report spending from as low as 25% to a high of 60-75%.
Once you retire, what you spend your money on usually changes dramatically. Commuting expenses vanish. Clothing tends to change from maintaining a wardrobe for work to jeans and a T-shirt, or other casual choices. Trips to the dry cleaners become infrequent. Many retirees find themselves with no mortgage, or downsized living space with lower taxes and insurance costs. Paying for your kids' education is usually finished. Since you have the time to prepare more meals at home, restaurant bills can drop dramatically.
2) You need at least one million dollars in savings to not outlive your money. What you need is enough to cover your current and projected expenses. For many of us, that does not add up to a seven figure investment account. While a million dollars may be what you eventually spend, you do not need to amass that total on your own.
Over the course of what I hope to be another 20 or 25 years on this planet, Social Security will have paid me several hundreds of thousands of dollars. The equity I have in my home will bring more when I sell it. The money I do have in IRA and investment accounts will grow each year, maybe by not as much as I'd like, but enough to keep me ahead of inflation.
As point #1 notes above, my living expenses are dramatically lower than they once were, even as the quality of my life has improved. Health costs will begin to consume more of my budget each year. But, Medicare, medigap and drug coverage means virtually anything that happens to me will not put me seriously upside down.
3) You can withdraw 4% of your savings each year and it will outlast you. For the last several years, and for the foreseeable future, this is no longer an automatic guideline. With interest rates mired as low as they are, withdrawing 4% from your investment pot of money runs the risk of a shortfall.
Even though points #1 and #2 are true, a retiree still must manage his or her investments prudently. While doable for the first few years of retirement when travel and lifestyle expenses may be higher, a drawdown of 4% over an extended time frame could leave you in a bind.
This is a when you adjust your lifestyle and expenses to allow you to sleep at well at night. If you can safely take out 3%, then build your budget around that number (along with Social Security and other income). If it is 2%, then make it work or add part time income to the mix.
In my case, I withdraw about 3% each year and find that is entirely sufficient for a very satisfying retirement lifestyle of family, home life, and travel. Can I afford a new car every three years? No, but I don't want a new car that often. Can I fly off to Maui on a whim? No. But, with careful planning I can still make a trip to paradise every few years. Frankly, I have happily adjusted to an income level that I would not dramatically increase even if I could.
I have chosen experiences over things, less worry instead of stress, and building a life around what I need and what I can afford to want: those are my three keys to success.
What are yours?
It really is fascinating to see how our spending has changed (and our needs/wants) since we both retired. I have about ten dress shirts and 20 ties in my closet, with seven sport coats and a suit that no longer fits (I've lost a bunch of weight!) And this is after I cleaned out the closet. I wear a shirt and tie once a week to church- the only other time is to funerals- yet those shirts are still hanging there. Most are too big since the weight loss! We drive much less but go to the gym 5 days a week. We cook and eat more at home but our less frequent eating out costs more since we tend to go to nicer restaurants. I haven't bought dress shoes in several years, but I go through "sneakers" lots faster. Etc, etc. Maybe we're still going through a transitional phase of retirement. I love it.
ReplyDeleteJeff in OK
Just last week I dropped off half a dozen dress slacks and three sports coats at Goodwill. They had been unworn for several years. I have two suits and half a dozen sports coast left...still too many but it is a process!
DeleteAgree completely, Bob, on how much is required in assets. But we all have to remember who is paying for and printing these articles, namely money managers and money management firms. Obviously they have a vested interest in getting people to either save more if they have little saved, or save more if you have already saved a lot ("just in case"). The bottom line is that they will tell you that you need "lots". As you pointed out some things go up in cost during retirement, while others likely go down.
ReplyDeleteAt this stage in our lives most of us have probably learned a thing or two about money management. Our experience has also likely taught us how to navigate choppy financial waters. Personally I do not see a lot of seniors struggling as the articles would lead us to believe; I have no doubt they exist, but not in the numbers the money management folks and government would want us to believe.
As for myself, buying things isn't really what drives me. Our vehicles are bought new, but one is eight years old and the other is four. I like dressing casually so clothes are inexpensive, and we both have given away a lot of our former work clothes, holding some for when needed. Living in a low COL environment we tend to spend more than most on things like our vacation club maintenance, gas, and meals out (and medical, but that is a given for everyone). But most of those are for experiences, like yourself, which we enjoy a lot. So where do we stand? Deb has now been fully retired for eight years, and yours truly for two. We are in great shape financially, with a net worth the same or higher than when I retired, and I haven't even started taking out $ from SS and the like. Unless things change dramatically, and we stay on course, we should be fine, like so many other retirees.
Yes, the figures often bandied about come from folks with vested interest in investments and savings. However, I am constantly reminded that the average 50 year old American has less than $10,000 saved for retirement. So, maybe pushing excessive savings motivates some people to ramp up while they still can.
DeleteMy work days were filled with wearing suits, lots of first class air travel, and 150 nights a year in hotels. I much prefer my jeans, T-shirts, sneakers, and staying away from airplanes whenever possible!
Our lifestyle has changed so much since retiring that we are considering going down to one car! After a year and a half of experimentation, we found we really are homebodies..we enjoy shorter trips more than long trips, and we use our HOME to the max:the yard provides a gardening hobby, the pool and hot tub make it feel like our own private resort, and we mostly cook at home too--so that's a lot of money saved right there! We have time to scope out travel deals when we do wish to travel and just returned from a very frugal but fun trip to a small fishing village in Mexico! It costs approx. one third what we used to pay for vacations when we worked and had to "hurry.." We'll spend another week vacation at the Jersey shore with Ken's brother and sis in law, enjoying the beach and some seafood and nights out back barbecuing. We don't buy work clothes,either. And of course the cost of commuting and work lunches is absent. My church has a variety of activities that are fun to attend and a local book club is free,too. I am taking a watercolor class for just $30 for 8 weeks at our local Senior Center.There are many bargains out there when you have more TIME. After years of keeping a home, we don't need any more furniture or art work. Retirement is not as financially challenging as the newspapers and financial advisors make it. You have to plan, and revise as you go. We are not happy with the interest rates (who is!) but we have adjusted. Life is good! Thanks for sharing..
ReplyDeleteWe can swap stories at lunch next week! WE are very much on the same page.
DeleteI have a post coming up that you recommended: last minute and low cost travel sites. That might feed your travel bug!
My restaurant bills have actually gone up; but they are easily financed by the money saved on expenses for the kids. Meanwhile, I agree on experiences over things, less worry instead of stress. But you moved in the past year. As someone starting the moving process myself, I have to ask: How does that translate into less worry and less stress?!?
ReplyDeleteThe move cut our travel time to and from the grandkids from 45 minutes each way to 4 minutes. That is a lot of hassle eliminated.
DeleteOur new home is better insulated and constructed that the one we left in Scottsdale. The property taxes are lower, as are the utility bills. Less financial stress.
The actual packing and moving = stress. But the payoff was so positive it was worth a few months of unease.
I agree with you, Bob, about the financial planners who over-estimate the high cost of retirement. It's like qualifying for a mortgage; just because you could afford the house on paper doesn't mean you should commit to it. It really does boil down to how you want to live. Obviously some lifestyles are more expensive than others. My finances don't allow travel on a whim, but like you, I can plan annual vacations out of the country if I choose to. I enjoy what is available in my community with my friends. I still have that vacation-state-of-mind with not having to punch the clock and go to work, and it's been 3 yrs! It has been said that retirement years can be divided into 3 segments - the go-go years; the slow-go years; the no-go years. There is something to be said about maximizing the healthy years. I am always conscious of what I can "afford to want".
ReplyDeleteGenerally, I am a homebody. But, the road still calls. Betty and I leave for an Alaskan Cruise in a few weeks, are spending some time in a San Diego Beach house in July with the whole family, and have a 2 month RV trip planned for late summer-early fall. I guess we are still in the go-go phase after 15 years!
DeleteRetirement. It is everything we dreamed, and more. I love the million dollar figure. My sister has been told three million. Such a waste of a great time in their lives. On the other end I have two good friends who will enter their sixties with about 10,000 and a mortgage. OW! The job losses in people's fifties was crushing!
ReplyDeleteWe live on 40% of our highest income before retirement. We currently live on only my husband's pensions and we save his social security. We plan on using that money for larger travel with family. By next iyear all of my husband's traditional IRAs will be Roth, so our income will not increase in the next six years.
Our plan is to keep that magical $250,000 in the bank for any end stage things that are needed. We figure when the second of us gets to the end stage, our house will carry those bills. We already downsized and moved to a place that is both much cheaper to maintain and easier to sell. It was one of the best decisions we have made. My husband no longer owns a suit. He owns one tie and button down shirt. The rest of the wardrobe is jeans and polis or t shirts. What a chraxter :)
I have read that those in the 20's or 30's will need a minimum of $2 million to retire. While that figure is just as suspect as today's $1 million, there is no doubt we have moved to a time when one's retirement is largely a self-funding requirement. Pensions and the like are disappearing as rapidly as companies can manage to dump the obligations. Workers don't stay with one company long enough anymore to build up much 401(k) value anyway.
DeleteCongrats to your husband on his de-suiting. One of the two I have left are being taken on an upcoming Alaskan cruise. Betty wants to attend the formal night dinner on the ship, so on goes a suit for the first time in years. I have a handful of ties left, probably the wrong width for today, but will have to do.
Twelve years before I retired (2014) I read a book called Get a Life .. You Don't Need a Million To Retire Well, written by Ralph Warner. This book helped me realize that I could still live a comfortable retirement without saving a million dollars. That I could still travel and even buy a new car if I wanted.
ReplyDeleteI live on 40% of what I did when working. My two vehicles are a 2007 and 2006 and barely driven. When I glance at my checkbook register, which is actually a Excel spreadsheet by year, I have the same amount of money available as I did a few days before each payday. Granted I am not saving nearly as much as I did when working but still I have more than enough money for everything I need.
There was some downsizing in possessions when I thought of selling out and RVing in 2011, but didn't. I downsized my house to a 2-bedroom, 1,000 sq ft when I moved here in 1997. Basically the best thing I did to prepare and to live in retirement was to change my spending habits ... buying only if it is needed and not on impulse.
Trading dollars for time was definitely a good decision and for many years one that I was afraid to make.
Trading dollars for time = a clear shot at satisfaction. Interesting how you and the comment right above by Janette use the same 40% of prior income as your new normal-exactly what I am doing. Maybe we should form a 40 percentage club!
DeleteI have not heard of Mr. Warner's book but sounds like one I check check out.
We live on 36% of our income before retirement, but that's because our house is mortgage-free. We overspent the first few years of retirement, but then we realized that we needed to rein in our spending. We did it fairly easily, employing some of the same budgeting skills that we had used back in the late 60's when we were saving to put my husband through law school. We stopped taking money out of savings at all, although we'll have to begin again when my husband reaches 70 next year. I wish I could get back some nights of sleep in our fifties that were punctuated with wake-up-gasping-in-the-middle-of-the-night fear about how we were going to make it on our substantial but under-a-million savings. We've made some mistakes. For example, we didn't start converting IRA's to Roths. We've been hit by unexpected difficulties: I went from super athletic for my age to someone dealing with many health issues. I have brain surgery scheduled for 5/24, for example, but I just had a biopsy for possible thyroid cancer yesterday that may postpone the brain surgery. I have an autoimmune illness. I can still say that my life is fulfilling. I'm practicing the piano, a new instrument for me, reviewing higher-level mathematics on Khan Academy so that I can help my grandchild via FaceTime with her AP high school class homework, tutoring a neighbor's high schooler in English, seeing a few valued friends, participating in a reading group, volunteering with TomNod, and finishing the rough draft of the first novel I've written since I had books published in the 90's. (Mentioning that I write and tutor someone in English guarantees that I've made a gazillion grammatical mistakes in this post, but I'm blaming my anti-epileptic medication.)
ReplyDeleteFirst of all, our prayers are with you for the brain surgery, whenever it occurs, as well as the cancer issue. With these rather serious health issues, I love the attitude displayed in your comments. You are defining life on your terms by not allowing the problems to define or limit you.
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