If you’ve read much in the personal finance world, or even just the occasional news story from the business section of your local paper, you are probably well aware of the non-stop stream of headlines about how people are not prepared to retire. Chances are you have visions of old people shut up in their homes clustered around a single candle for light and warmth. But, is this reality, or just great financial copy?
A recent Marketwatch article reports on a survey where almost 80 percent of retirees found it easier than they thought to adjust their lifestyle and spending for retirement. This matches more closely with my experience as a financial advisor than the alarmist headlines do. Some real world retirement planning is all you really need.
Retirement Crisis for All?
As is so often the case, the reality of finances is very individual. As a result, generalizations are often inaccurate for large swaths of people, even while being correct for many others.
When I was a Certified Financial Planner, the reality is that I had a lot more clients who were planning for retirement than those who were actually retired. I never did a financial plan for someone that ended with, “I’m sorry. There’s just nothing we can do. You are going to be poor and starving when you retire.” Sure, some people were closer than others, but saving and investing always work out eventually.
For clients that were already retired, the situation was different. It was more about what they could do with the money they had. Many of our conversations revolved not around how to eat and survive, but whether or not they should pay off their house, or whether the could afford that vacation in retirement.
How can it be that most of the people I worked with had the ability to retire just fine, even if they couldn’t fulfill their every dream, when headlines from every major money publication scream about the impending retirement crisis?
There are two parts to the answer. First, truly poor people seldom seek the advice of a financial planner. They are much more likely to talk to someone like a credit counselor or social worker. Second, it turns out that what you NEED to retire is very different from what you THINK YOU WILL NEED to retire.
What Is Retirement Planning?
The most common goal people in their 30s, 40s, and even 50s have when it comes to retiring is to travel. It seems somewhere along the line we got this idea of jet setting around the world as the ultimate retirement. This is great news for a financial planner trying to get clients to invest more and think more seriously about their retirement plan than just putting money away in a 401k. (For most people, sticking away money in your 401k is all the retirement planning you need, but that isn’t how you make a living as a financial advisor.)
But, while imagining those great trips and investing enough to generate 80 percent to 100 percent of your current income is the rule for most financial planning sessions, there are two realities along the way.
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Retirement Planning Definition
It turns out that the definition of retirement planning is fluid.
First, people who actually want to travel do it long before retirement. It’s not like Paris is off limits until you turn 65. I, myself, have been to a dozen European countries and see myself back there, plus in Japan, Australia, and some cool places in Canada before the decade is out. That is a lot of travel before I retire.
Do, I still want to travel when I retire? Sure, but chances are, it will actually travel less than I do now, not more.
Second, after retirement, people talk about relaxing and pursuing hobbies. As it turns out, this takes up a lot more of the average retiree’s time, despite being much less focused on during building a retirement plan. And, most hobbies aren’t that expensive, especially once you have the startup costs behind you.
Consider me, again. I like programming and doing things with computers. I also like hiking, skiing and golfing. I’m trying to use an app to learn French, and I plan to learn to scuba dive with my daughter. Again, I won’t be waiting until retirement to be doing these things. Once I get there, I’ll have more time for them, but will I have the high retirement expenses from starting up these hobbies, or will I already have my golf clubs, skis, and scuba calculator?
I may need new golf clubs every few years. Paying for tee times costs money, but it’s not the same as traveling the world. Hiking is basically free, and if I do keep skiing as a retiree, a season pass is just $500 or $600 each year. Scuba might be the expensive part, but I live in Colorado. Just how much scuba diving will I do in an average year?
In other words, while I’ll have expenses as a retiree, I’ll also have a lot of low-cost options of things to do with my time. And, if things don’t work out for me, I can drop some of my hobbies or recreation without turning into a pauper either. Maybe I don’t get a season pass to ski. Maybe I only go up three or four times per year. Maybe I only play golf twice a month. Maybe I earn some money on the side. Maybe I gladly spend more time babysitting grandkids. Heck, that doesn’t sound so bad even if I do have plenty of money.
This is where the crisis fails to develop.
Retirement Planning Options
Yes. To keep my lifestyle as it is now, or to get the one I imagine, when I retire, I’ll need a sizable nest egg. But, the reality is that I’m already on my way. I’ve been putting money in IRAs and 401(k)s. I have another couple of decades to do it. If it doesn’t work out, I’ll have retirement planning options. None of which involve shivering in the dark.
For people who maybe aren’t as fortunate as me, the reality is actually the same. If you can’t afford to travel, or golf, or ski very often while you are working, you probably aren’t expecting to be able to do those things after you stop working.
On the other side, for people doing better than me financially, my retirement description may sound meager. Again, however, their current situation is probably different than mine as well. Maybe beyond a maxed out 401k and some IRAs, they also have trust funds, and annuities, and all that land the family owns up in Montana. So, when they get to retirement they’ll be fine too, even if a step or two down from whatever they envisioned, and a step up from what I hope for.
So, where does the crisis come from?
You remember earlier when we were talking about all that travel, and the things we wanted to do for retirement? Well, the retirement planning advisor runs a simulation from a retirement planning worksheet that projects how much money you will need to do stuff when you retire. Then, they run another retirement planning calculator that shows how much you need to save and invest to get there. Inevitably, the numbers always say the same thing: You do not have enough to retire, even though what it really means is that you probably won’t retire exactly like you imagine.
And, there you go. Put the data together and 85 percent (or whatever) of people aren’t saving enough “to retire.”
But, the reality is that 85 percent of people aren’t saving enough money to do everything they think they will want to do when the retire. That’s a very different thing. The truth is that when it comes to just being retired and enjoying it, they’ll probably be just fine.