We’ve been doing it wrong all these years…
(Here’s a video I did recently talking about this.)
Traditional retirement planning revolves around concepts like the 4% rule. Here’s how a typical scenario goes:
Hopeful Retiree (HR): “I really want to retire because I can’t stand my crappy, old job. Please tell me I can.”
Financial Advisor (FA): “You definitely came to the right place! I can help. So, first thing we need to know is what your current salary is.”
HR: “Oh that’s easy. $100k.”
FA: “Great. Financial planners recommend you plan to have 80% of your pre-retirement income in retirement. So, you’ll need $80k a year once you retire. Now we can start the planning process. How much do you have in your retirement plan?”
HR(in a somewhat shamed voice): “ummmm…only $200k. But, you know, we had to raise 3 kids. You know how expensive that can be… “(laughs nervously)
FA(stern voice): “Oooh. That’s going to be tough for you. In financial planning we use a 4% rule to give a guide about how much you can safely take from your portfolio without running out of money. So, 4% of $200k is $8k a year. Do you have a pension?
:HR: “ummmm…. no”
FA: “Um. ok. Any idea what your Social Security will be?”
HR: “yeah, I went online yesterday and it had my Full Retirement Age it will be $2300 a month.”
FA(does some calculations. Looks up and says very sympathetically): “Well, between your $8k a year from your portfolio and your Social Security, you’ll only be bringing in $35k a year. That’s not enough.”
HR(Dejectedly): “man…I was hoping to hear something else.Is there anything else we can do?”
FA: “Well, we can do some fancy planning around Social Security. What’s your wife’s benefit?”
HR: “She actually didn’t work. She stayed home to raise the kids.So, I guess she doesn’t qualify.”
FA (in an all-knowing voice): “Well actually she CAN get half of your benefit!” (Pauses to let his genius settle in.) “So, if your benefit is $2300 a month, her benefit will be $1150.”
HR (brightens up and says in a most hopeful voice): “So, we might have a chance then???”
FA: “Unfortunately, even with her benefit, you’re only bringing in around $50k. You’re still about $30k a year short of what you’ll need. Sorry.”
HR(Pauses as the news sets in. Even more dejected now.): “Is there anything you can recommend?”
FA: “Only thing I can tell you is to keep working and save more. Then come back in say 3-5 years.”
HR: “Man, I was really, REALLY hoping to avoid that. But I guess you’re right. Looks like I’m stuck for a few more years.”
Okay, that’s the end of our dialogue. Happy it’s over, eh?
Now, here’s the quiz for you. What was missed in this conversation?
The MOST IMPORTANT question that needed to be addressed, right out the gate, but was not; “How much do you NEED to live on?”
Let me state this as clearly as I can:
NOTHING MATTERS MORE THAN YOUR EXPENSES IN RETIREMENT.
So, as you begin your own journey into retirement planning start with how much you’ll need to live on. Don’t use some silly rule of thumb like 80% of your current income.
Think about it like this. There are 6 of us in the Scandlen household. Let me tell you something it costs a LOT of money to raise the little crumb-crunchers. A. LOT. OF. MONEY. ( I wouldn’t change it for the world of course, but in case you didn’t hear it costs A. LOT. OF. MONEY!)
Fast forward ten short years when our youngest is out of the house, hopefully joining the military, but certainly not taking on 100k in debt to study historical fiction novels at State U. What will our expenses be at that time?
Nothing even close to what they are today. Not even close.
But let’s also say I’m still at my same crappy, old job making the same amount of money(adjusted for inflation) I was when all 4 kids were still living at home. In inflation adjusted numbers I was making $100k while raising 4 kids and when the kids are gone I’m still making $100k.
I go to that smart financial advisor in the story above and he asks the same questions he asked that guy; What my income is.
The problem though is my income has NOTHING to do with what Charlotte and I will need to live on in retirement. In fact, when we calculate it we realize we’ll need probably $4k a month if that. Mortgage is paid off.
We’ll downsize, and hopefully generate get some equity out of the home that we raised the kids in. All the expenses for sports activities are gone, braces-gone, medical bills for broken bones – gone, food for 6 – gone, auto insurance premiums for TEEN AGE BOYS – done, homeowners insurance and property taxes on a small house WAY REDUCED. Health insurance premiums for 2 is MUCH cheaper than for 6…
And you see where this is going, no? We will live much cheaper than we did before. So, why in the name of the Good Lord, would we look at our income needs as any percentage based on our salary? Makes no sense!
So, to wrap this up, when it comes to your retirement planning, start with the end in mind. How much do you NEED… not how much you have.
In the next email I’ll share with you the 2nd most important number you need for retirement planning. Stay tuned.