Long View Media

Tag: PreTire

  • Pretirement 103: Decide What “Enough” Means

    Pretirement 103: Decide What “Enough” Means

    How much money do you need to retire?

    It’s one of the most common retirement questions.

    One million dollars?

    Two million?

    Ten times your salary?

    Twenty-five times your annual spending?

    There are plenty of rules of thumb, and some can be useful as starting points.

    But none of them can tell you what enough means for you.

    Enough isn’t an account balance.

    It’s the point at which the resources available to you can reasonably support the life you want to live, with enough margin to handle uncertainty.

    That definition is less convenient than a single number.

    It’s also much more useful.

    Start With the Life, Not the Portfolio

    In our previous Pretirement article, we asked readers to figure out what they actually spend.

    That’s where defining enough begins.

    Suppose two households each have $1 million saved for retirement.

    The first expects to spend $60,000 a year and will receive $50,000 from Social Security and pensions.

    The second expects to spend $100,000 and will receive $35,000 from Social Security.

    They have identical retirement savings.

    They don’t have identical retirement situations.

    The first household needs its savings to fill a relatively modest annual gap.

    The second needs its savings to provide a much larger portion of household income.

    Asking whether $1 million is enough therefore misses the most important information.

    Enough depends on what the money needs to do.

    Calculate the Gap

    A useful way to begin is surprisingly simple.

    Estimate what your retirement lifestyle will cost.

    Then identify the dependable income you expect from sources such as Social Security and pensions.

    The difference is the amount the rest of your resources need to provide.

    Imagine that you expect retirement to cost $75,000 a year.

    Social Security and a pension are expected to provide $55,000.

    That leaves a $20,000 annual gap.

    Now your retirement savings have a job.

    They don’t necessarily need to support a $75,000 lifestyle.

    They need to help support the portion of that lifestyle not covered by other income.

    That’s a much more useful way to think about a retirement portfolio.

    But Don’t Stop at the Gap

    The calculation isn’t quite as simple as:

    Spending minus dependable income equals required withdrawals.

    Taxes matter.

    Healthcare matters.

    Inflation matters.

    Investment results matter.

    Large irregular expenses matter.

    And retirement may last for decades.

    Your income and expenses may also change at different times.

    Perhaps you retire several years before Social Security begins.

    Perhaps a pension starts immediately.

    Perhaps a mortgage disappears five years into retirement.

    Perhaps travel spending is highest during the first decade.

    Later, required distributions from retirement accounts may affect taxable income.

    Retirement isn’t one financial year repeated thirty times.

    Defining enough means thinking about the whole retirement rather than solving only the first year.

    A Withdrawal Rate Isn’t the Definition of Enough

    Retirement planning often uses withdrawal rates to estimate how much income a portfolio might support.

    These can be useful planning tools.

    For example, someone might begin with an assumption that a certain percentage of retirement savings could be withdrawn during the first year and then test how that approach behaves under different assumptions.

    But a withdrawal rate isn’t a law of nature.

    A 4 percent assumption isn’t automatically safe for everyone.

    A 5 percent assumption isn’t automatically reckless.

    The appropriate starting point depends on factors such as retirement age, expected retirement length, investment allocation, flexibility in spending, other income, taxes, inflation, and future market returns.

    PreTire can use a withdrawal assumption to create a starting estimate.

    Then you test it.

    The assumption helps you ask the question.

    It doesn’t answer the question for you.

    Enough Includes a Margin

    If your retirement plan works only when everything goes exactly as expected, you probably haven’t finished planning.

    Markets fall.

    Inflation happens.

    Roofs need replacing.

    Cars fail.

    Healthcare needs change.

    Family members sometimes need help.

    People live longer than expected.

    None of this means you need enough money to survive every imaginable catastrophe.

    No realistic retirement plan can guarantee that.

    It means there should be some room between barely works and works comfortably.

    That margin might come from additional savings.

    It might come from spending that can be reduced temporarily.

    It might come from dependable income covering most essential expenses.

    It might come from insurance.

    It might come from delaying a major purchase during a difficult year.

    Different households will create resilience differently.

    The important thing is that the plan doesn’t require perfection.

    Enough Isn’t the Same as Maximum

    This distinction becomes increasingly important as retirement approaches.

    There is almost always a way to make the financial position stronger.

    Work another year.

    Save another $30,000.

    Pay off another debt.

    Wait another year to claim Social Security.

    Let the portfolio grow longer.

    Then do it again next year.

    From a purely financial perspective, more resources are generally preferable to fewer resources.

    But retirement isn’t a contest to accumulate the largest possible balance before you die.

    The purpose of the money is to support your life.

    At some point, the question changes from:

    Could we have more?

    to:

    Do we have enough for what we want to do?

    Those are very different questions.

    Define What Enough Is Supposed to Provide

    A useful definition of enough should include more than monthly bills.

    What kind of retirement are you trying to fund?

    Do you want to travel frequently?

    Remain in your current home?

    Move closer to family?

    Maintain two vehicles?

    Support hobbies?

    Help children or grandchildren?

    Give to charities?

    Eat at restaurants regularly?

    Own an RV?

    Spend part of the year somewhere else?

    Leave a substantial inheritance?

    None of these is a requirement for a successful retirement.

    But if something matters to you, it belongs in the conversation.

    Otherwise, you may calculate enough for a retirement you don’t actually want.

    Separate Security From Aspirations

    It can help to think about retirement spending in layers.

    The first layer supports the basic household.

    Housing.

    Food.

    Utilities.

    Insurance.

    Healthcare.

    Transportation.

    Taxes.

    The second layer supports the lifestyle.

    Travel.

    Restaurants.

    Entertainment.

    Hobbies.

    Home projects.

    Gifts.

    The third layer might include larger aspirations.

    Extensive travel.

    A second home.

    Major gifts to family.

    A large legacy.

    Expensive hobbies.

    The exact categories don’t matter.

    The distinction does.

    A retirement plan in which dependable income covers most essential spending and investments support flexible spending behaves differently from one in which investments must cover nearly every household expense.

    Understanding those layers can help you understand what enough actually means.

    Debt Changes the Number

    Suppose you enter retirement with a $2,000 monthly mortgage payment.

    That’s $24,000 a year your retirement income must support.

    If the mortgage is eliminated before retirement, the required income could fall substantially.

    The same principle applies to vehicle loans, credit cards, personal loans, and other obligations.

    This is why PreTire focuses on both sides of the retirement equation.

    Saving more increases the resources available.

    Reducing recurring obligations decreases the resources required.

    Both can move you toward enough.

    Sometimes eliminating an expense can improve retirement readiness as much as increasing an investment account.

    Enough Can Change

    Defining enough doesn’t mean carving one number into stone.

    Life changes.

    Inflation changes prices.

    Investment values change.

    Social Security estimates change.

    Housing decisions change.

    Health changes.

    Relationships change.

    Your idea of a satisfying retirement may change too.

    A retirement target at 45 shouldn’t necessarily remain unchanged at 55.

    Review it periodically.

    As retirement approaches, estimates should gradually be replaced by actual numbers and actual experience.

    That’s another reason the PreTire method is useful.

    If you’ve practiced living on your expected retirement income, you aren’t relying entirely on a projection.

    You have evidence.

    Be Careful With Comparison

    Someone you know may retire with $500,000.

    Someone else may insist that nobody should retire without $2 million.

    A financial article may tell you what the average household has saved.

    A retirement calculator may produce a target that looks frighteningly large.

    Those numbers can provide context.

    They can’t define enough for your household.

    The person with $500,000 may have a pension that covers nearly every normal expense.

    The person with $2 million may have no pension, high spending, significant debt, and an expensive lifestyle.

    Account balances are easy to compare.

    Retirements aren’t.

    There Is a Cost to Waiting for Certainty

    Uncertainty makes people uncomfortable.

    Retirement contains plenty of it.

    We don’t know exactly how long we’ll live.

    We don’t know what markets will do.

    We don’t know what inflation will be twenty years from now.

    We don’t know exactly what healthcare we’ll need.

    So it’s tempting to respond by accumulating more.

    Then more.

    Then a little more.

    Eventually, the pursuit of certainty can become its own risk.

    A person may spend healthy years working to protect against increasingly remote possibilities while postponing the retirement those savings were supposed to provide.

    There is no financial number that eliminates every possible future risk.

    Enough cannot mean guaranteed to survive anything that could ever happen.

    That standard may be impossible to reach.

    Enough Is a Decision Supported by Evidence

    A good Pretirement plan doesn’t tell you that retirement will be risk-free.

    It helps you understand the risks you’re accepting.

    You know what you actually spend.

    You know which expenses are likely to change.

    You know what Social Security and pensions are expected to provide.

    You understand what your savings need to contribute.

    You’ve considered taxes and healthcare.

    You’ve allowed room for irregular expenses.

    You’ve tested what happens when assumptions are less favorable.

    And, ideally, you’ve practiced living on something close to the income you expect to have.

    At that point, enough stops being a mysterious number.

    It becomes a conclusion supported by evidence.

    Know What You’re Trying to Achieve

    There will always be someone with more money.

    There will always be another financial milestone you could reach.

    And another year of work will almost always improve the numbers.

    None of those facts tells you whether you have enough.

    Enough is personal, but it doesn’t have to be vague.

    Start with the life you want to support.

    Understand what that life costs.

    Subtract the income that doesn’t need to come from savings.

    Determine what your investments need to provide.

    Build in reasonable room for uncertainty.

    Then test the result against real life.

    The goal isn’t to find the largest retirement number you can possibly reach.

    It’s to reach the point where your resources can reasonably support the retirement you actually want.

    Don’t ask how much a retiree should have. Ask what your retirement needs to provide, then determine what resources are required to provide it.

    That’s what enough means.

    Long View Media provides general educational information, not individualized financial, investment, tax, legal, or retirement advice. Retirement needs, investment returns, inflation, taxes, Social Security benefits, healthcare costs, and individual circumstances vary. Withdrawal rates and other financial assumptions are planning tools, not guarantees. Consider your own circumstances and appropriate professional guidance when making significant retirement decisions.

  • Pretirement 102: Know What You Actually Spend

    Pretirement 102: Know What You Actually Spend

    How much does your life cost?

    It sounds like a simple question.

    Most households can probably tell you their mortgage or rent. They know roughly what they spend on groceries. They know the electric bill, car payment, insurance premiums, and other regular expenses.

    Add those numbers together and you have a budget.

    But you may not have the cost of your life.

    The difference matters when you’re planning for retirement.

    A retirement plan built around what you think you spend can look perfectly comfortable right up until real life begins.

    Your Monthly Bills Aren’t Your Monthly Spending

    Suppose a household adds up its normal expenses and concludes that it spends about $5,000 a month.

    That’s $60,000 a year.

    That becomes the retirement target.

    But during the year, the house needs a $2,000 repair.

    Car insurance is paid every six months.

    Property taxes arrive.

    The vehicle needs tires.

    There are birthday and holiday gifts.

    A dental procedure costs more than expected.

    The family takes a $4,000 vacation.

    An appliance fails.

    There are registration fees, memberships, subscriptions, clothing purchases, charitable donations, and dozens of smaller expenses that don’t appear in the normal monthly budget.

    None of these expenses is particularly unusual.

    But together they may mean the household that believes it lives on $60,000 actually spends $70,000 or $75,000.

    That difference can substantially change a retirement calculation.

    Start With Evidence

    Instead of asking what you think you spend, look at what you actually spent.

    A full year is a useful starting point because it captures many expenses that don’t occur every month.

    Bank statements can help.

    Credit-card statements can help.

    Personal-finance software can help.

    Tax records may identify some large expenses.

    The exact method doesn’t matter as much as the objective.

    You’re trying to reconstruct what it actually cost to operate your household for a year.

    Don’t begin by deciding whether an expense was reasonable.

    Don’t try to create the perfect budget.

    Measure first.

    You can make decisions later.

    Don’t Forget the Expenses That Hide

    Some spending is easy to overlook precisely because it isn’t regular.

    Home maintenance is a good example.

    You may go months without spending much on the house and then suddenly replace a water heater, repair an air conditioner, or hire someone to fix a roof.

    Vehicles behave similarly.

    Gasoline appears every week.

    A transmission doesn’t.

    But both are part of the cost of owning the vehicle.

    Travel can disappear from a monthly budget even when you take one or two significant trips every year.

    The same is true of dental work, eyeglasses, hearing care, veterinary expenses, gifts, technology replacement, furniture, and major appliances.

    If an expense happens every few years rather than every month, that doesn’t make it free.

    It means the cost needs to be spread across time.

    Look Beyond One Unusually Good Year

    A single year can also mislead you.

    Perhaps you didn’t need any major home repairs last year.

    That doesn’t mean the house will never need repairs.

    Maybe your ten-year-old car ran perfectly.

    That doesn’t mean it will never need to be repaired or replaced.

    Perhaps you skipped travel because of family circumstances.

    That doesn’t necessarily mean travel should disappear from the retirement plan.

    Your objective isn’t to recreate one calendar year perfectly.

    It’s to understand the normal cost of the life you intend to maintain.

    If you have several years of spending records, looking across them can help reveal expenses that a single year misses.

    Then Ask What Retirement Changes

    Once you understand what life costs today, you can begin estimating what retirement might cost.

    This is where the exercise becomes much more useful than simply multiplying current monthly spending by twelve.

    Take your major expenses and ask what happens to each one after retirement.

    Some will continue.

    Property taxes don’t disappear because you retired. Neither do groceries, utilities, insurance, home maintenance, or vehicle expenses.

    Some expenses may decrease.

    You may spend less commuting to work. Work clothing, parking, lunches, and other employment-related costs may fall.

    Some expenses may disappear.

    A mortgage might be paid off. A child may become financially independent. Retirement contributions made from your paycheck will no longer be necessary once you’re retired.

    Some expenses may increase.

    You may travel more. You may spend more on hobbies or entertainment. Healthcare costs may change. Being home more can even affect utilities and household spending.

    And retirement may introduce expenses you don’t have today.

    The point isn’t to assume retirement will be cheaper or more expensive.

    It’s to identify what actually changes.

    Retirement Contributions Are a Special Case

    This one can cause confusion.

    Suppose you’re currently saving $2,000 a month for retirement.

    That money reduces what is available to spend today.

    But you probably won’t need to continue saving for retirement after you’ve retired.

    So if your current gross income is $100,000, that doesn’t necessarily mean you need $100,000 of retirement income to maintain the same lifestyle.

    Part of today’s income may be funding tomorrow.

    Once tomorrow arrives, that particular expense can disappear.

    That’s one reason replacing an arbitrary percentage of your salary isn’t always a good way to determine retirement needs.

    Your retirement lifestyle is supported by spending, not by your former salary.

    Debt Payments Are Another Special Case

    Debt illustrates why Pretirement planning can be so powerful.

    Suppose you’re paying $1,000 a month toward debts that will be completely eliminated before retirement.

    That’s $12,000 a year your retirement income won’t need to provide.

    But don’t remove that expense from the retirement budget simply because you hope the debt will be gone.

    Build the plan around what will actually happen.

    If your retirement calculation assumes the mortgage disappears at 65, make sure the mortgage really will be paid off at 65.

    If the car payment is supposed to disappear, consider whether you’ll eventually need another vehicle.

    A retirement budget should reflect decisions and realistic expectations, not convenient assumptions.

    Separate Essential Spending From Flexible Spending

    Once you understand your total spending, another distinction becomes useful.

    Some expenses are difficult to reduce quickly.

    Housing.

    Food.

    Insurance.

    Healthcare.

    Utilities.

    Basic transportation.

    Other spending is more flexible.

    Travel.

    Restaurants.

    Entertainment.

    Hobbies.

    Gifts.

    Home improvements.

    Those categories don’t have to be labeled “needs” and “wants.” Life is more complicated than that.

    The useful question is:

    Which expenses could we change if we needed to?

    That tells you something about the resilience of your retirement plan.

    A household that needs $70,000 for basic obligations has less flexibility than one that spends $70,000 but could comfortably reduce discretionary spending during a difficult year.

    The total is the same.

    The risk isn’t.

    Don’t Build a Retirement You Don’t Want

    There is another temptation when estimating retirement spending.

    You can make almost any retirement plan work if you cut enough from the lifestyle.

    No travel.

    No restaurants.

    No hobbies that cost money.

    Keep every vehicle forever.

    Never help the grandchildren.

    Never remodel the house.

    Never spend anything that isn’t absolutely necessary.

    Eventually the spreadsheet balances.

    But you may have created a retirement you don’t particularly want.

    The purpose of understanding your spending isn’t to force it as low as possible.

    It’s to decide deliberately which expenses are worth supporting.

    Perhaps travel matters enormously to you.

    Perhaps maintaining a particular home matters.

    Perhaps helping family is important.

    Perhaps dining out means very little and could easily be reduced.

    Those are lifestyle decisions, not mathematical mistakes.

    Your retirement plan should support your priorities.

    Practice With the New Number

    Once you’ve estimated what retirement will actually cost, PreTire gives you a way to test it.

    Try living on that amount while you’re still working.

    If the projected retirement lifestyle requires $65,000 a year, see what living on approximately that amount feels like.

    Continue tracking the expenses.

    See what you forgot.

    See what feels comfortable.

    See what feels restrictive.

    If the number works, you’ve gained evidence that your retirement estimate is realistic.

    If it doesn’t, you’ve learned something while you still have time and income to make adjustments.

    That’s far more useful than discovering the problem during your first year of retirement.

    Watch Out for Spending Drift

    Spending changes gradually.

    A streaming service is added.

    Then another.

    A vehicle gets upgraded.

    A hobby becomes more expensive.

    Restaurant spending rises.

    A few conveniences become normal.

    None of these decisions necessarily creates a financial problem by itself.

    But together they can move the cost of your lifestyle substantially over several years.

    That’s why measuring spending isn’t a one-time Pretirement exercise.

    Check it periodically.

    You don’t need to track every cup of coffee for the rest of your life.

    You do need to notice when a $60,000 lifestyle has gradually become a $75,000 lifestyle.

    The retirement plan should be based on the life you’re actually living.

    Don’t Confuse Frugality With Accuracy

    Someone who considers themselves frugal can still underestimate spending.

    Someone who spends generously can understand their spending perfectly.

    These are different questions.

    Pretirement isn’t asking whether you spend too much.

    It’s asking whether you know what you spend.

    Judgment comes later.

    Accuracy comes first.

    Once you know the number, you can decide whether you’re happy with it.

    You might discover expenses you want to eliminate.

    You might discover you’re already living comfortably on much less than expected.

    You might find that your retirement goal is closer than you thought.

    Or you might discover that the lifestyle you’re planning requires more retirement income than your current plan is likely to provide.

    Every one of those discoveries is useful.

    Know the Number That Matters

    Retirement planning often begins with investment balances.

    How much is in the 401(k)?

    How much is in the IRA?

    How much will Social Security provide?

    Those are important questions.

    But they describe only one side of the equation.

    The other side is your life.

    What does it cost?

    Not what should it cost.

    Not what a retirement calculator assumes it costs.

    Not what you remember spending.

    What does your actual life cost?

    Measure it.

    Then decide what will continue, disappear, decrease, increase, or be added in retirement.

    That gives you something much more useful than a generic retirement-income target.

    It gives you a retirement-income target connected to the life you actually intend to live.

    Before you ask whether you have enough for retirement, know what “enough” needs to pay for.

    Long View Media provides general educational information, not individualized financial, investment, tax, legal, or retirement advice. Household spending and retirement needs vary considerably. Use your own records and circumstances when estimating retirement expenses and consider appropriate professional guidance when making significant financial decisions.