In the last post, The Real Purpose of Having Money: Living Life on Your Own Terms we challenged the idea of financial independence being a specific number ? usually a very high one ? and focused instead on specific financial conditions that give you the kinds of options that enable you to live life on your own terms. That seems like a more worthwhile goal than reaching a specific financial target.
In this article, I want to take a similar position specifically on retirement. We?ve all seen the retirement guides and blog posts recommending seven-figure retirement portfolios, and how to get there. But should that be real goal of retirement? Or is it, as I believe, merely creating a comfortable life?
When viewed from that perspective, not only does the financial objective change, but both the definition and the strategies involved in retirement are fundamentally different. What?s more, we can come around to the realization that retirement isn?t all about money.
Having Enough Money for Retirement
Despite what I believe to be an overemphasis on the accumulation of money, there?s no doubt retirement requires a certain amount of it. Even if your overriding goal is creating a comfortable life, there is a dollar amount that will be necessary to make that happen.
One of the issues that causes people to overreach is the notion that you?ll be entirely dependent on your retirement portfolio for survival. If that were true, very few people will ever retire.
Naturally, crunching numbers for retirement should start with Social Security. Yes, I realize a lot of people believe Social Security will go ?bankrupt?. I?m not one of them, and I?ve explained the reasons why I don?t think it will. Now that isn?t to say that benefits won?t somehow be reduced or inflated to some lower real value. But it will be there in some amount.
Any monetary discussion of retirement should start with checking your benefit using the Social Security Retirement Estimator.
Now that doesn?t mean you should plan to rely primarily on Social Security benefits. But it is a starting point.
Calculate how much you?ll need to live comfortably on monthly basis, then subtract your estimated Social Security benefit. The difference will be the amount you?ll need to provide from other sources.
If you have a pension from a current or previous employer, that?ll fill at least part of the gap. But if it doesn?t, you?ll need to rely on either investment income, a post-retirement career, or a combination of both.
Working an Example of Retirement Income Needs
After crunching the numbers, let?s say you determine you need $5,000 per month to live comfortably. A check of the Social Security Retirement Estimator shows you can expect a benefit of $2,000 per month.
Your task will be to find an additional $3,000 per month.
If you plan to do that entirely through retirement investments, you can use what is known as the safe withdrawal rate. It?s a theory that holds that if you invest your money in a balanced portfolio of stocks and bonds, and withdraw about 4% per year, you?ll never outlive your money.
You can do this using a mathematical equation. $3,000 per month is $36,000 per year.
If you divide $36,000 by 0.04% (4%), you?ll come up with $900,000.
That?s the amount of money you?ll need saved and invested by the time you retire to enjoy a full-time retirement.
Obviously the vast majority of people won?t have that kind of money. And that?s why you may need other strategies for creating a comfortable life.
Plan on Working in a Reduced Capacity after Retirement
AARP reports that 32% of people age 65 to 74 will be working by 2022, up from 20% in 2002. It also reports that 11% of those 75 and older will be employed, compared to 5% in 2002.
Whether by choice or necessity, an increasing number of people in the traditional retirement years will remain employed. We might even suspect those numbers will be higher if the economy experiences yet another episode of the ?worst economy since the Great Depression? recessions.
The point is, it may be worth it to build some sort of post-retirement career planning into your retirement plans. In fact, no one even questions if their lives will? even be happy doing absolutely nothing. Many do lose their sense of purpose after retiring completely.
Taking the example from above to the next level, if you need to make a $3000 per month in additional retirement income, and you only have $300,000 saved (generating $12,000 at 4%), you may need a plan to earn an additional $2,000.
Creating a Post-retirement Career or Business
Most people planning retirement face that consideration with dread. After all, retirement and working in any capacity are contradictions in terms.
But once again, we have asked the critical question: is retirement about no longer working, or merely creating a comfortable life? For millions, not working at all won?t be an option, so creating a comfortable life becomes the default Plan B.
But if you will need to continue working, begin planning now so you can work on your own terms.
There are several ways you can approach this:
- Identify work you actually like to do, so it won?t be so emotionally taxing.
- You don?t have to continue with your current career, you can do something completely new.
- Plan to work no more than part-time. Semi-retirement is better than no retirement at all.
- Consider starting a post-retirement business, which can enable you to do work that you like, and on your own schedule.
Even if you haven?t been able to do anything like this up to this point in your life, you may be able to once you reach your 60s. After all, at that point you?ll have no dependent children in tow, the major expenses will be behind you, you?ll have more control over your life and expenses, and you?ll have at least some income from other sources, like Social Security, pensions, and investments.
The basic idea will be to create a sustainable post-retirement career that will be well suited to later in life. It may not be easy, but it is doable.
No Matter Where You?re at Now, Start Saving and Investing
We can probably think of building a retirement portfolio and creating a post-retirement career or business as being mutually exclusive ventures. If you won?t have much of a retirement portfolio, you?ll need to seriously emphasize a post-retirement career. But if you expect to have a large retirement portfolio, you?ll be less dependent on a post-retirement career.
I?ve long been of the opinion that it?s important to save and invest for retirement matter how old you are. That even includes saving and investing after reaching 65.
Any money you do have can produce at least some income that will make you more comfortable in life, if only by reducing your dependence on earned income.
For example, maybe you can?t save $900,000, or even $300,000. But if you could save $150,000, and withdraw $6,000 per year (again, 4%), that will be an extra $500 per month in income.
And even if you can?t reach $150,000, $50,000 would at least give you a large emergency fund. It may not be the kind of money you can retire on, but it will at least provide you with liquidity. For example, it will give you cash to cover short-term emergencies or a disruption in income. That alone could take away the urgency and panic that are intimately connected with financial difficulties.
While some people have fairly complicated investments, that often result in stress during financial emergencies, a nice cash cushion could keep you comfortable during such times ? even if it can?t provide for you for the rest of your life. You may not be prosperous, but at least you won?t be poor.
Get Control of Your Living Expenses
Most retirement planning starts with what I believe to be a mistaken assumption. That is, the notion that you need to replace your current income, so you can sustain the standard of living to which you?ve become accustomed.
For most people, they?ll be a cruel fantasy. If you?ve been living on $50,000 a year during your working life, you may need to create a lifestyle that can be sustained on $30,000. We know it?s possible, because people do it all the time.
One of the first, best ways to do that is by getting out of debt. Too many Americans have come to live at peace with their debt, and are carrying it well into old age. But if you?re going to have limited retirement resources, debt will be your mortal enemy.
If that?s the case, one of your primary retirement strategies will be to begin paying down and paying off your credit cards, and even your car. In fact, a limited income may put an end to borrowing to buy a car. A $300 a month payment may be unsustainable on a limited income.
It?s also important to begin gradually lowering your expenses. Like most other things in life, spending is a habit. If you?ve been living at Level X most of your life, you won?t be able to suddenly drop down to Level Y once you reach retirement. If you even try, it?ll probably feel like a crash diet. And we know those don?t work.
Get comfortable living on less now, and your situation will be better when retirement arrives. But there?s an added bonus: by cutting your expenses now, you?ll free up money for savings and debt reduction. That?s a goal worth pursuing.
Housing presents a special problem. If you own your home free-and-clear, you may be all set, but if you still have a mortgage, particularly one with a big payment, that may need to change. If you?re not in a position to pay it off, you may have to consider selling your house, and moving to less expensive quarters. You may even need to consider a co-housing arrangement, which I believe is going to be the wave of the future for retirees.
When it comes to lowering living expenses, macro-frugality ? lowering your biggest expenses, like housing and debt ? is the more constructive approach. That will give you more financial breathing room with the smaller expenses, the kind that usually make your life more comfortable.
If you won?t be able to sustain your current lifestyle based on your projected retirement income, you?ll have to find a way to bridge the gap between expenses and income. That may be increasing income, lowering expenses, or a combination of both. And depending on your circumstances, the effort may need to be a radical one.
Creating a Comfortable Life ? the Kind You?ll Want to Lead
As I wrote in The Real Purpose of Having Money: Living Life on Your Own Terms, I think there?s too much emphasis placed on having a certain amount of money saved for retirement. First, relatively few will achieve a $1 million+ investment portfolio by retirement. Second, not everyone is capable of reaching a mid- to upper-six-figure portfolio. If like the majority you?re in that group, you?ll have to have a way to work around that.
I think that starts with getting away from a number fixation. Rather, start by thinking about the kind of life you?d like to lead in retirement. Too much emphasis is placed on how am I going to survive, which has a very definite negative meaning.
The more positive approach is to concentrate on how you hope to live.
Start by assessing the advantages you?ll have once you reach retirement ? nearly everyone has some. But it?s also important to set at least loose goals.
Maybe you can?t retire to the beach and play golf and snorkel all day, but maybe that?s not what you want anyway. Spent some time thinking about what you do want.
- What do you want to do with your time?
- Is there someplace else you want to live?
- If money wasn?t the primary motivation, what kind of work would you do?
- Who do you want to help (volunteering and other charitable activities)?
- Who do you want to live with or near?
- How do you want to manage your health?
- What overall purpose do you want your life to have?
- What are the financial implications to the answers to any of the above questions?
- Are there provisions you?ll have to make now, to enable you to live the life you want?
Focusing on the Quality of Your Life, Rather than on the Quantity of Your Money
What we?re talking about here is really addressing quality of life issues. These are precisely what gets lost when the goal becomes mainly a money target. Or, we can buy into the myth that you need a lot of money to achieve a good quality of life.
Maybe. Maybe not.
The reality is that even without all the money you may need to have the TV version of retirement, your life is still worth something ? and a lot more than you think. It?s even possible to spend so much time fixating on money that you never find your worth as a human being. That?s tragic.
But the people around you value you, and usually in a way that has nothing to do with money. And beyond your immediate current social circle, are other people out there who can benefit from knowing and interacting with you.
Perhaps the most important person to connect with however is yourself. If you haven?t done that up until this point, the retirement years will present the perfect opportunity. Perhaps by connecting with yourself, and with the things that are most important to you, you?ll find that better place in life.
Unfortunately, in our money driven culture, we?re programmed to put a dollar value even on finding our better selves. But you may be surprised to find that money has little to do with it ? in fact, if you don?t have much money, you may even be devaluing yourself. That?s completely counterproductive.
Focusing on Creating a Comfortable Life, Not Your Bank Account
Maybe then the best strategy is to focus more on creating a comfortable life, and worrying less about reaching a certain dollar goal for retirement.
Some people will reach their monetary goal ? good for them! But if you won?t be among them, you?ve got to have an alternative strategy. And you may just find it?s better than a money goal.
As the saying goes, you can?t take it with you. And if you can?t, the best money can do is make you comfortable in the meantime. And that may take a lot less money than you think, if you handle your life the right way. You can, if you think less about money, and more about creating a comfortable life. And that?ll be more about how you plan to live, and less about how much money you have.
I?ve known too many people who reach retirement with little or no money ? yet live compelling lives ? to believe otherwise.