In all my years as a financial planner, I never met someone who had “enough” money to retire when they were in their 40s or even 50s. Yet, every year, I saw clients who either were already retired, or were retiring. The interesting part was that they didn’t have “enough” money to retire either, no matter how much money they were stuffing into a 401k plan or IRA account. The glitch in this system is the assumption about how much money you’ll need and where it will come from.
How Much to Retire
Determining how much money you need to retire, which in some circles is getting called, your magic number for retirement, is just two calculations, but the data is filled in with several guesses. The only math comes in the form of a time value of money calculation in order to reach a single number that is calculated form a present value calculation. Simple right, well it would be, if we knew:
- How much money you’ll spend each year in retirement
- How long you will live
Unfortunately, we don’t know either of those two things, so we guess.
Guessing doesn’t sound very like something an advisor or planner would do, so instead you’ll hear the word assumptions, but it’s nothing more than a guess based upon what data you have today about what your future will look like. Of course, a good advisor will review your plan every year, or so, and revise those assumptions as needed. In other words, those wild guesses will get more an more refined as you get closer to actually retiring. However, if you saved your financial plans from your 20s or 30s, you’d find many of your assumptions laughable by the time you turned 55, or even 60.
Why You Need Less to Retire
As it turns out, most people need far less money to retire than they projected. Why is that?
The answer is that the assumptions that you make for the retirement you want are typically very rosy, which if you think about it, is sort of the worst-case scenario for your retirement plan. Here are some of the assumptions you’ll be making when making your retirement plan, and why they will lead you to overestimate how much money you actually need to retire.
- You’ll live a long time – Nobody wants to run out of money, so your retirement plan most likely doesn’t have you dying anytime before 85 or 90. Truth is that while more of us are living longer, it still isn’t exactly rare to die in your 70s. If you’re planning as a couple, it’s even less likely that you’ll both make it to 85 or 90.
- You’ll be active and spending money at the same rate your whole retirement – Even if you and your spouse both live a long time, how much money do you think the average 83 year old spends? While you might be a golfing, traveling, eating out, whirlwind when you first retire, that generally slows down as you age. Seriously, go ask any 80+ year old you know what they do in an average month, and you’re probably going to find some very low monthly expenses.
- Lifestyle – Golfing, fishing, traveling. These can be expensive pursuits. You are right to want to save as much as possible. On the other hand, in between those things, you’ll have a regular, every day life. Will that be as expensive as you think? Turns out most clients spend LESS money in retirement, and often by a LOT. You’ve probably never thought of how much of your expenses in life are tied to you working, or being a parent.
- Social Security – We often asked clients if they wanted to include Social Security in their retirement plan. Almost everyone said no, then followed up with a comment about how it won’t be there when they retire. My dad has been saying that since he was 40-something. In a few years when he retires, he’ll finally be proven wrong. Chances are Social Security will look different when you make it to retirement age, but chances are slim it will be gone completely.
- When You Retire – Most people’s retirement plans have them retiring relatively early. This is a good thing. You don’t have full control over your employment. On the other hand, many people like what they do, and they have no intention of running out the door the second they turn 65.
The truth is that when it comes to retirement planning, you are taking a shot in the dark at important variables. That isn’t how other things typically work. If you are doing a college savings plan, for example, you know exactly when your kids turn college age. Planning for four or five years of college is a very solid bet. The only variable is the actual cost, and that can be projected reasonably well. So, opening a 529 savings plan is a solid bet with reasonably estimated costs. It’s also one reason why fewer doomsday articles about not having enough money for send your kids to college exist.
So, how much do you really need to retire?
Up next, we’ll take a look at where those numbers come from, and then I’ll tell you the secret to really having enough money when you retire.