Don’t let the “retirement police” sap your motivation to keep socking money away.
We’ve all heard it – that mantra that beats out from the gurus and pied pipers of the financial planning and “financial independence” world reminding us of the large sacks of cash that we’re going to need in order to “retire”.
A million dollars or more, we’re told, is an absolute minimum if we aspire to do all that awesome stuff that defines a person’s retirement years. Stuff like dining in nice restaurants, vacationing around the world, refining our golf game and chilling out whenever we want.
On a superficial level it’s pretty easy to nod our heads in agreement with the idea that the more money we can sock away for the future, the greater our array of retirement options and the more satisfied we will be. Personally, I believe that a retirement account with a nominal value of over a million dollars is a great target to shoot for. (I also believe that if you start early enough, achieving this goal can be a fairly painless journey through consistent frugality, saving and the magic of time + compound interest.)
But on a more personal level we have some harder questions to ponder. Such as, how much money do we really need to store up in order to maintain a good quality of life after we quit working? At what level does the ability to spend more in retirement start bringing diminishing returns?
How much of an impact will the size of our nest egg have on what I call the “Retirement Big 3”: contentment, health and personal relationships?
The retirement industry is more focused on making a profit from managing your nest egg than it is in your true retirement needs.
A large percentage of the financial planners and advisors out there are, for all practical purposes, salespeople and brokers whose incentive to bag higher commissions trumps their consideration of our specific needs. I would say that advisors that act as true “fiduciaries” – folks who manage our assets for the benefit of us rather than for his or her own profit – are in a definite minority.
In addition, many money managers ultimately serve two masters: the stakeholders in the company they work for (private owners, partners or shareholders) and the clients whose money they manage.
When you couple this with assumptions that do not reflect the behavior of real people and the marketing machine that is often necessary to keep the flow of new clients moving in a positive direction, what you end up with are exaggerated estimates of our future consumption requirements and overstatements of how much money most of us will actually need in retirement.
The prevalent view of our retirement needs is one that requires upwards of 20 times our yearly earnings so we’ll finally be able to enjoy life to the fullest without obligations, commitments or worries. We’re painted a picture of glorious golden years that are stress free and full of leisure. It’s all about us, we’re told; we deserve to kick back and pamper ourselves as a reward for a lifetime of hard work.
What’s usually glossed over though, is the equally-important other side of the coin. Left out of this picture are discussions and presentations of strategies for spending down our saved up money in a way that will allow it to last right up to the day we leave this mortal coil. I think this is a major problem.
It Isn’t Really ‘All About The Money’
First off, we should understand that wealth has a “diminishing marginal utility”. In other words, the more money that we have, the less happy each incremental dollar will make us. Since we actually need very little money in order to survive, after we’ve gone beyond our basic needs, spending more money won’t necessarily have much of an effect on our level of happiness.
Thus, once we’ve achieved a baseline level of financial independence, our quality of life is determined more by our contentment, health and personal relationships and a lot less by how much money we can afford to spend each month.
Secondly, most of us tend to spend less as we grow older. There is usually a big drop in our overall consumption and we tend to be not as interested in buying new things as we were in our earlier stages of life. In addition, our household expenses usually decrease, we stop contributing to savings and investments, and our taxes become more favorable.
In fact, recent studies show that health-related expenses are the only household budget component that shows an increase throughout our retirement years. And these expenses peak at around 20 percent of household spending for those over age 85, with the average being 14 percent of the budget for all Medicare-eligible households.
So does that mean that saving for the future shouldn’t be one of our priorities in life? Of course not. What I’m suggesting is that instead of Fantasy Island, retirement objectives should represent the reasonable dreams of real people.
Financial preparation is important for our future and if we diligently set aside adequate savings during our working days we’ll have the necessary provision for our later years. We’ll be able to enjoy the liberty to seek opportunities and options that will allow us to employ our lifetime store of experience and wisdom without having to hold down a full-time job.
The earlier we start banking on our future, the better our chances are for positively impacting our circle of influence in our later years without eventually becoming a financial burden to any person or organization. Even if past bad choices or unfortunate circumstances have stunted someone’s financial growth, that doesn’t mean those things should define their future.
Prospects are still good and a realistic vision of a secure future can still be carved out, and it doesn’t take millions to do it. It just takes the financial self-discipline to live within our means in the present so we’ll be able to provide for ourselves in the future.
Retirement Can Be An Idol
While it’s foolhardy and irresponsible to continually squander our current resources without regard to our future, we definitely don’t want to make retirement planning, saving and management into some kind of idol. There is a huge difference between building our lives around the goal of storing up to live out our years in idle luxury, and saving for a future in which all our needs are met so we can realize our calling and forge a legacy.
There’s nothing wrong with pursuing pleasurable activities in retirement, but the main focus of our later years shouldn’t be spent just chasing pleasure. If we’ve been able to earn, save and invest such that we no longer need to bring home a paycheck to take care of our needs, that doesn’t mean we should stop our personal growth and quit using our talents and God-given gifts.
In all likelihood, the reality for many will probably be different than the luxe retirement promoted in the media. The most recent statistics reveal that there is a wide gulf between the retirement plans of most folks and the projected future values of their financial resources.
For example, among the working households in the US, 4 out of 5 of them do not have retirement savings that are at least equal to their annual income. So, if you aspire to have some kind of a post-paycheck life is that a futile pursuit? Are you destined to endure it living in less than desirable surroundings subsisting on cheap food and handouts?
As you close in on your retirement years, if you project that you will fall short of having the funds to retire from work completely, you’ll need to adjust the “wants” part of your retirement vision accordingly. You will have to start thinking about ways to utilize your skills and talents in order to bring in an income after you retire and then make a plan to take some action.
The way I see it, in this situation you basically have two options: Work a traditional job or create a job to retire into. I would suggest the second choice. Find a way to take the skills and knowledge you’ve gained thorough all your years in the work force and find a way to monetize those personal assets.
The Bottom Line
The main thing that impacts the cost of retirement is longevity, yet one can still live out a long, active and meaningful post-retirement life on much less money than the retirement industry preaches. It may not mean jetting over to play eighteen holes at Old St. Andrews and wintering in the Caribbean, but could easily mean fulfilling part-time work punctuated by frequent rounds at the public links and backyard barbeques with a few close friends.
In my opinion, post-retirement years should be defined by the realization of one’s calling in life and the cementing of a legacy. The main thing to remember is that the quality of retirement is impacted the most not by money, but by contentment, health and personal relationships.