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Life is Not A Dress Rehearsal For Retirement: Start doing some of those things you are dreaming about today!

09/19/2018
By Jack Towarnicky

Professor Dan Ariely and Mrs. Aline Holzwarth, principal of the Center for Advanced Hindsight, both of Duke University, posted an article in the September 4, 2018 issue of the Wall Street Journal titled, “How Much You’ll Really Spend in Retirement, Probably a Lot More Than You Think.” Here are two excerpts from that article:

  • First, in surveys, they asked hundreds of people, “How much of their salary they thought they would need in retirement.” The answer most people gave was about 70%. 
  • Second, in surveying those same people, they asked them to identify how much they would like to spend. “The results were startling: the percentage we came up with was 130%.”

The authors then suggest the next step to “translate this annual amount to the total amount you will need over the course of your full retirement (is to) simply multiply the annual amount by the number of years you expect to be in retirement. For most of us, that’s about 20 years.” 

Most Won’t Increase Spending in Retirement!

How can I say that? Easy: most won’t have enough money. 

Let’s start by reducing that 130% figure to dollars. The current median household income in America is $62,175. Multiply that by 95% (130% less 35% of retirement income to be sourced from Social Security), equals $59,066. Now, as the authors direct, multiply that by 20 = $1,181,320. Assuming a 2% real rate of return, by my calculation a median income American household who plans to spend at a 130% replacement rate must save approximately 30% of household income each year for 37 consecutive years – from age 30 to the Social Security Normal Retirement Age of 67! 

So, this envisioned level of “like to spend” assumes more than one million dollars of savings. I’m reminded of “Comedy is Not Pretty,” a Steve Martin gig from decades ago. Steve exclaims, “You can be a millionaire and never pay taxes! You can have one million dollars and never pay taxes! You say, Steve, how can I be a millionaire and never pay taxes? First, get a million dollars.”

For most, retirement is not a savings challenge, it is a spending challenge. The issue here is the word “like,” as in I’d “like to spend” more. The only way workers can save 30% of household income is to deny or defer spending on some essentials and almost all desires. And to that: no I say! Start doing those things you are dreaming about today, now! Don’t defer. 

70% is a Common-Sense Goal

Where does 70% come from, anyway? As financial expert Michael Kitces observes, “In the end, people can only save what they haven’t already spent. Ideally, households will spend less than they make. With the added benefit that if you spend less in the first place, you will also need less to retire It’s not really the “savings rate” that defines a successful savings path to retirement. It’s actually the spending rate – and having a spending rate that is less than 100% of household income. Or stated more simply: you can’t actually choose or control your savings rate because there may not be any money left to save in the first place. But you can choose and control your spending rate.” 

Finally, even 70% may overstate the need. Consider some age 85+ retirees who retired more than 15 years ago. The Society of Actuaries found that, “retirement is not a static financial event, but one that evolves over time. (Retirees) tend to be frugal and don’t have a large amount of expense to cover. This may be largely generation-driven, that is, as a result of being raised by Depression-era parents, or it may be a result of the lower activity level that comes with older age. Most are living primarily on Social Security and most have incomes of less than $2K per month, they usually do not spend more than their income. Most report spending less now than they did in the past, especially on travel and entertainment.” 

True Stories on How it Really Works

Meet Hugh & Sheila. This couple was in their early 60s when they evaluated their finances in 1983 as part of a pre-retirement seminar. Hugh says, “Well, the numbers say we can maintain our pre-retirement standard of living. We can make it, but it won’t be a retirement full of wining and dining.” Sheila responds, “We weren’t living a life of luxury while you were working, what makes you think we should in retirement?”

Meet Mike & Mary. Mike was a fire fighter. Mary was a homemaker who sold real estate on weekends. Together they had five kids. Their only retirement “dream” was a trip to Hawaii with Mike’s buddies and their wives- each had served in the Pacific during WWII. All five kids went to college. They burned the mortgage. All was on target, except that Mike died at age 53. 

The lesson: Start doing some of those things you are dreaming about today, now!

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