Retirement Planning – Three Keys to Success? by Bob Lowry
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?
By Bob Lowry