April 17, 2010


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When you think of  a rose, do you marvel at the beauty of the flower or think about the prickly thorns?  You get both.

Retirement is like a rose. We're lured by the beauty, but continually reminded of the high price. We face many obstacles. Investment returns are volatile. Company pension plans are disappearing. We're living longer. Medicine does ever-more but costs more and more. Governments face financial crunches because of the aging population. So we personally need to save more more more.

What if the math is wrong?

What if we're actually saving too much? Maybe we don't need 70% of our pre-retirement income when we stop working. That's the discussion in Living on less and loving it in Ellen Roseman’s blog.

Before you start spending your retirement dollars today, consider these two questions:
  1. who benefits if you save too much?
  2. who loses if you save too little?
You do in both cases.

Saving Too Much

If you think you’re saving too much, you may have more than you need. You’ll never know because the final tally takes place when both you and your spouse have died. The remaining value of your estate, can go to your heirs, causes you support and taxes.

You can't predict the future. We couldn’t have predicted the past.

We are living longer than ever. Even if you’re frugal, you could easily face unexpected expenses. Suppose you require a wheelchair. Could you get into your home without a ramp? Would you need a different vehicle? How do you use your kitchen? Is your bathroom accessible by wheelchair? How do you get into the tub? Maybe you need to move to a nursing home. They aren’t cheap.

Even if you’re healthy, your retirement savings could expire before you do. That’s the risk of longevity. Imagine losing financially by living longer. How horrible.

Saving more than you think you need gives peace of mind. You immunize yourself from economic downturns on the route to retirement too.

You might still run out of money but you’re taking extra precautions to reduce that likelihood.

Saving Too Little

Do you really want to imagine the scenario of running out of money after decades of hard work? Even if you want to start working again, what kind of employment could you find? McJobs might get replaced by cheap, reliable robots. You might not have the physical stamina to work.

The government is there to help as a last resort but how much money do you think they'll have as the population ages?

Maybe you've got children and grandchildren. Maybe they can and will support you. Will they resent you too? How will your dignity be affected?

Under saving increases your financial risks and makes you vulnerable to adversity. As with exercise and diet, the savings habit takes time and persistence to show results. Starter sooner gives more time for the magic of compounding growth.

How Much Is Enough?

Suppose you think you you can retire in comfort on 50% of your current income. Do you know how much capital you'll need? There are many unknowns. We're living longer. Investment returns are volatile. Inflation could return. If your real returns drop 1% below your projections, what does that do to you?

There's a book called The Number by Lee Eisenberg. It's readable but the title is misleading. You won’t find simple formulas to estimate how much money you need to retire. Instead, you how retirement money actually gets spent. That could be an eye-opener, especially if you haven’t save much money to date.

If you haven't read The Millionaire Next Door by Thomas Stanley and William Danko, do. You'll come away with a much different understanding of the self-made wealthy. They live below their means and save save save. This prepares them for adversity and opportunity now and for the rest of their lives. How's that for a plan?

Would you rather accumulate more than you need or end your life financially dependent?


Podcast Episode 63 (5:06)

direct download | Internet Archive page

PS Prepare to enjoy the retirement rose but pay heed lest the thorns prick you and draw blood.


WealthWebGuru said...

Nice post! I like your rose analogy because I think we need a balanced approach to retirement planning. On one hand you have the financial industry promoting fear that we are not saving enough but yet on the other hand, you see thousands of very successful retirees without millions and millions of retirement savings living a good life.

I've always said, retirement can be anything you want it to be, you must figure out what you want it to be. Retirement is personal. for me, I'd rather put myself in a financial position where I feel secure and comfortable than not save enough. They key is not to determine how much is enough (because enough never comes) but what is enough (That's the tougher question)?

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Brian Poncelet,CFP said...

It's like flying a plan do you want extra fuel or just enough to land?

If you have just enough (money) as some in the media suggest then don't get into any headwinds or you will crash or have to land in the water or bush and have to walk to your destination.

James Morgan - Puritan Financial Advisor said...

We're lured by the beauty, but continually reminded of the high price. We face many obstacles.