Most retirement discussions begin with how large a nest egg is needed for retirement and an estimate of the correct percentage withdrawal rate. While these questions are important, they are generalizations that don’t answer the most important questions.
The Big Question
Focusing on what your investments will generate is important but does not mean you’ll have a financially successful retirement. The big question is how much you spend or how much you will be spending in retirement. Then, compare that to anticipated income. As people age, savings and spending habits change:
- You may stop saving/deferring for retirement
- Children may be educated and off your payroll (hopefully)
- Home(s) may be paid off
- Travel and discretionary spending for hobbies may increase
- You may increase or reduce charitable giving
Generally, people spend more in the early years of retirement as they travel and less as they age and have crossed items off their bucket list.
Start Planning Early
The earlier you start, the easier it is to make course corrections along the way. Small changes now could dramatically affect the outcome 20 years from now. While assumptions and information become less precise the further you go into the future, it’s still a good exercise. As Dwight D. Eisenhower said of the planning for the D-Day invasion of Europe:
“In preparing for battle, I have always found that plans are useless, but planning is indispensable.”
Don’t make the mistake of thinking that you are financially prepared simply because you’ve maxed out your 401K deferral. Depending on spending and debt, that may not be enough. It is better to find out early that a course correction is needed than decide work is no longer enjoyable or physically viable and you want to stop working.
Delicate Balance
The balance is to save enough for tomorrow, but still enjoy yourself today. One of the saddest comments I’ve heard came from an older client who said he had an opportunity to travel more with his wife and friends 20 years ago but was concerned about spending too much. Now, he has the money, but his wife and friends are either gone or cannot physically travel.
Lesson: Planning can also lead to discovering that you don’t need to save as much and should enjoy life more now. It’s better for you to drive a Mercedes now than for your kids to drive one after you’re gone.
As always, your Dent Moses advisor is available to help.
