Retirement planning in the days of our parents consisted of what was called “the three-legged stool.”
The 3 legs were Social Security, Pension and Savings. But today’s “stool” is missing at least one leg, and a second leg has a visible crack in it. Is the savings leg enough to fully fund the retirement plans of today and tomorrow?
Will you have enough money saved to retire? If money is the only means of reaching the retirement planning pinnacle, the answer to this question, for most people, is “No.”
But this provocative question sure has made its way into countless financial media headlines and marketing brochures, attracting loads of profits into the coffers of banks, brokerage firms, and insurance companies posing as advisers.
If more of my fellow money managers and financial planners were honest with clients, they wouldn’t stop with the conventional advice to either increase savings rate (usually beyond what is affordable), to invest more aggressively, or to delay retirement until the magical financial goal is met.
Retirement Planning: The Conventional Way
The only people on the planet who have a reason (although not a good one) to see retirement planning as purely a financial pursuit are the people that make money and finance a profession.
Here’s what the conventional adviser or planner will shape a retirement plan:
- Begin the plan by arriving at a required income need in retirement, adjusted for inflation.
- The income need is projected to be 80% of pre-retirement income.
- Save enough money and invest at a required rate of return to reach the dollar amount that will generate the required retirement income.
- Plan for initial withdrawal rate of 4%, which will then increase every year by an average rate of inflation, such as 3%.
To provide an example, let’s say a person in their 40s today is living well enough on a $50,000 annual income. Assume they plan to retire at the conventional age of 65. At a 3% rate of inflation, their income need will be nearly double to approximately $100,000 by retirement.
Therefore the 80% income need is $80,000. To get this annual income from investments alone, and to make it last for up to 30 years, the 4% rule will be applied. Therefore the savings total needed by age 65 is $2 million, which would generate $80,000 per year. This annual withdrawal would then increase by 3% rate of inflation each year and would expect to be 100% depleted in around 30 years or so.
But returning to the present day and 40-something person, if they are “normal,” they don’t have more than $50,000 saved toward the $2 million goal. Do you want to take a guess how much money per month must be saved to reach this target in 20 years, assuming an outstanding annualized return of 8%? If you guessed anywhere lower than $3,000 per month, you would be wrong.
Who can save $36,000 per year for 20 years? I suppose Social Security income might help in this equation but the question still remains: Is it smart to think money is the only aspect of retirement planning that can help you reach your goals?
Retirement Planning + Career Planning = Life Planning
Instead of feeling anxiety when a financial planner tells you, “Save 15% of your income now and invest more aggressively or you’ll never retire,” you can begin planning and preparing for a life of doing something that you love, which is the essence of retirement. If you are currently years away from the conventional, financially accomplished retirement (or you are in retirement now and looking for supplemental income and/or more meaning in life) you can begin the research and education now to find a career or line of work that is rewarding beyond financial means.
Therefore the “new retirement plan” can be the one that includes more than just the traditional savings vehicles, such as Individual Retirement Accounts (IRAs) or the 401(k). Retirement planning today can and must include the goal of doing what you love. Part of this plan is knowing how to qualify or train for this career and how much it will pay. Then you will know how much savings you will need to supplement this income in your retirement.
In different words, career planning is a crucial aspect of retirement planning today. Some advisers and planners call this “life planning.” Rather than striking fear into the minds of clients by saying, “You may need to work longer and delay retirement,” they can say, “You could retire sooner if you consider looking for full- or part-time work that you enjoy.”
When you love what you do, why would you ever want to stop working? In that case, you’re not really “working,” you’re giving your life meaning and purpose — you’re already “retired!”
Kent Thune is a money manager and financial planner who “retired” at the ripe age of 37, when he started his own investment advisory firm. He teaches his clients how to plan for pre-retirement and retirement by incorporating career planning into their goals.