Cost to Retire - How Much Money Does it Take? (Part 2)

In Part 1 of this discussion, we looked at first defining what retirement means to you and how it should look. We covered some key factors to consider when planning for your retirement. And finally, we offered two quick math options to estimate how much money you need to save, and how much that will provide annually. Click here to read Part 1, How Much Does It Cost To Retire. 

WHAT HAPPENS IF YOU RUN OUT OF MONEY IN RETIREMENT?

In our discussion in Part 1 about using a .035 withdrawal rate on a retirement savings balance of $500,000, we determined that would allow you to withdraw $17,500/year to live on. If you planned ahead with your financial planner to combine this amount with other income such as a pension and Social Security, then factored in things like having your home paid off and no other major expenses, this might be comfortable for you. 

We also shared advice to work with your financial planner to watch for “blind spots”. These are potential problem areas you may not have considered in your basic retirement planning. If you find yourself in a situation where some of these unplanned circumstances have occurred, or you’re spending more money than you planned, you won’t be financially prepared to handle the new expenses easily. 

As a result, maybe you decide to increase your withdrawal rate from the recommended .035 (3.5%) to .10 (10%). In the example of a $500,000 retirement savings that would give you $50,000 a year to enjoy a nicer lifestyle or cover unexpected expenses that require more money. But at a 10% withdrawal rate, your original $500,000 savings would run out much faster than you planned. After being retired for several years, do you want to be looking for work again at age 75? There won’t be many companies interested in hiring 75-year-olds, except maybe as door greeters or fast-food workers. 

IF YOU RUN OUT OF MONEY IN RETIREMENT, WHAT ARE YOUR OPTIONS?

CERTIFIED FINANCIAL PLANNER™ professional, Elijah Heath with Heath Wealth Management, offers some suggestions if this situation occurs. First, find a way to reduce spending. Set up a budget to see where money is being spent. Do a 30-day challenge and write down every penny you spend for that time, no matter how small it is. During the challenge, maintain your normal spending habits without making any changes. Once you see what you actually spend money on and realize where your money is going, Elijah says many of his clients become much better at watching their spending. 

Once you’ve reduced your spending you can look at other options, such as selling your house and then adding those proceeds to your savings. 

Could you move in with your adult children to save money? Unfortunately, this situation occurs when people didn’t plan ahead for their retirement. It’s very important to have a clear understanding of where you are financially and what changes you need to make to save for your future so don’t become one of those statistics. 

Another option is to find a part-time job to generate some income. Be creative. Sometimes a hobby can become a part-time job, whether you’re selling something you create or teaching others to do it.

One idea to avoid is to become more aggressive with your investments in an effort to make up for not saving enough money sooner. This can quickly turn into a bad idea and is not the best option in retirement. If you already have a small nest egg and you lose more money, you have almost no good options left to recover your losses at this point. 

WHAT DO YOU NEED TO DO TO PLAN AHEAD? 

There are many factors involved in deciding how much money needs to be saved. Some people might feel comfortable taking on this task themselves and using articles like this one to make better choices. For others, an independent fiduciary such as a CERTIFIED FINANCIAL PLANNER™ professional might be a great resource to explain all the options and considerations you need. 

Here’s an example of how one spouse can get the other engaged if they’re not interested in planning for retirement. One husband asked his wife repeatedly to sit down and talk about their plans. The wife insisted he was the one who managed their finances, he knew what she wanted, and she trusted him completely to make all the decisions. But the husband really wanted his wife to be involved in the process, so he created a scenario he thought would get her attention. 

He told her they could save enough money for retirement to spend $50,000 a year living in Europe for 6 months every year if she would save $1,000/month. She had never considered this a possibility before and was intrigued by the idea of being able to do that in retirement. She immediately began setting aside the $1,000/month and would regularly check with her husband to make sure they were on track for that retirement dream to come true. If your spouse isn’t interested in participating in retirement plans yet, find something that will make them interested and watch them support and contribute to that plan. 

Another couple had different ideas. The husband wanted to save enough money so he could spend  $1000 a month on his favorite hobby, golf. This made the husband happy, but the wife was not thrilled. Nonetheless, the couple built this goal into the retirement plan by creating a special pension for golfing. Once they retired, the husband was able to enjoy his time golfing and eventually decided to get a job at the golf course. This meant his greens fees were lower and had a little income coming in. This made the wife doubly happy because he was spending less on golfing and he was still out of the house enjoying his time away. 

See? Planning for retirement can be fun. Everyone’s definition is different, and an experience financial planner may be able to get creative to create the plan that is right for you. 

WHEN THE TRUTH HURTS

There are times when your planner may have to give you some difficult news. There may not be enough time or income to plan the retirement lifestyle you imagined. Or maybe the objective isn’t reasonable. This can be a hard conversation to have if there was really something particular you wanted to do in retirement. You will have to answer a tough question: Can retirement wait a few years so you can continue to work and save money? Or will you retire when you planned but adjust your lifestyle to live on less income? 

These are questions every person or couple must decide for themselves with expert guidance on what is possible. What dream is more important – the lifestyle or the timing? With a little bit of give-and-take, review your options and decide what’s more important to you. 

Here is the thing young people need to know about retirement: It’s not for old people. It’s too late to save for retirement when you’re old. The time to think about and plan for retirement is when you’re young. When you get your first job, it makes sense to develop good financial habits. Start saving for retirement first, then spend money on a car, clothing, or your first house. 

THE TALE OF THREE SISTERS

The best way to explain to young people the power of saving when you’re young is to consider the tale of twin sisters. Sister 1 graduates high school, gets a job and continues to drive her old car, making do with what she has while she focuses on saving money. Her goal is to save $4,000/year, which is tough. 

Sister 1 sees her twin spending money on nice things and having fun, but she’s not saving any money. Sister 1 continues to work, save, and invest her money for the next 10 years. At the 10-year point, Sister 2 realizes she’s falling behind on saving for retirement so she starts saving the same amount – $4000/year. 

At the same time, Sister 1 now decides she’s ready to stop saving and wants to start spending her money, so she stops investing. Sister 2 continues to save $4,000/year for the next 35 years. Both sisters invested their money the same way, but at the end of that 45-year period, Sister 1 has more money! Why? Because of the power of compounding interest she earned when she began saving early. 

Most people start too late to save money, which is why it’s harder to save enough for retirement when you wait. At a 10% compounded rate of return, the money Sister 1 saved would result in $2 million. 

Let’s add one more sister to this story and say Sister 3 started saving $4000/year at the same time as Sister 1 and never stopped. At the end of the same 45-year time period, she would have $4 million saved because of both compounding interest and saving consistently the entire time. 

Most young people don’t want to start saving early and they miss out on these opportunities. As this story illustrated, Sister 1 started saving early she gets an extra doubling of her money because she started saving and investing early. 

SAFELY LOSING MONEY

Some people are afraid to invest because they’re taking a risk with their savings. But when you factor in taxes and the rate of inflation, the money you have in a savings account at the bank is actually losing purchasing power – even if you’re “safely” losing it – because the bank’s savings rate is low. Many people miss out on growing their money because they’re afraid to take any risks of losing their money. Risk is scary. But when you work with a trusted financial planner, they will help you find the right balance between risk vs reward, and they may not be by taking the most aggressive route.

START EARLY – THE RULE OF 72

The rule of 72 shows you how long it will take to double your money. Let’s say you have a 10% rate of return. When you divide 72 by 10% you get 7.2 – that’s roughly the number of years it will take to double your money. If your rate of return at the bank is 1%, for example, it will take you 72 years to double your money. If your investments do well in the market and you get a 36% rate of return, that means you double your money in about two years. 

Heath Wealth Management believes it’s important to have conversations with children and teens to encourage them to start saving early and before they develop bad spending habits that are hard to break later. They also believe this discourages putting off saving for retirement for too long which may lead them to be tempted to make aggressive and risky financial decisions later. Instead, when young people plan long-term they can match their comfort zone with risk volatility. 

FINANCIAL SUCCESS VS FINANCIAL DISASTER CASE STUDIES

Elijah Heath shares two case studies, one a success and one a disaster: 

Case Study #1: A couple with a tremendous amount of debt and good credit came saying they needed help with their retirement plan. Elijah realized the first step was to fix their problem of spending too much money. He told them it would do no good to work hard and pay off all their debts if they were going to charge them back up again. The couple listened and agreed with Elijah. As a result, they were able to pay off all their credit cards and their mortgage, then saved enough to retire. He wishes there were more of these success stories. 

Case Study #2:  When one spouse died, the other spouse quickly accumulated $50,000 in credit card debt. Elijah helped the surviving spouse use part of his $100,000 savings to pay off the debt, only to discover a year later the spouse had $50,000 in debt again. He paid off the debt with his remaining funds but had no money left in his retirement account. He learned a valuable lesson from that experience – you must first fix the bad spending habits in order to fix the debt problem. Additionally, if the surviving spouse had filed for bankruptcy initially, the retirement accounts would have been protected. 

With any spending habit problems, the smart steps are to fix spending habits first, then build emergency funds with 6 months of expenses saved, then open a Roth IRA account. 

SUMMARY OF YOUR RETIREMENT PLANNING

Retirement planning is important and requires time to set it up properly. But the rewards of doing it well may mean the difference between enjoying your retirement years or being stressed about them. Consider the options and examples shared here and talk to your financial planner about how to save early and wisely for your retirement years. You could be “unemployed” for 30-40 years during your retirement. 

STILL HAVE QUESTIONS? LET US HELP

Elijah Heath, a CERTIFIED FINANCIAL PLANNER™ professional, is a *fiduciary with an ethical obligation to provide information, products, and services in your best interest, not what earns him the best fee or commission. Heath Wealth Management wants to be your advisor for life so you, your children, and your grandchildren all benefit from the relationship.

Call us to learn more, ask questions about your specific circumstances, and determine if we are the right fit for you. Our phone number is 813-556-7171. We can also be reached by email at Elijah.Heath@LPL.com.

*Fiduciary services are for advisory relationships only.